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2013 年 4 月 16 日
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26
http://www.futuresmag.com/2013/10/10/gold-struggles-in-frankenst
ein-economy?t=commodities
x
Below we see my inflation-or-deflation chart. Here we see the
bond/gold ratio. When deflation is seen ahead, gold will tend to
decline and bonds will tend to advance. The chart shows the
bond/gold ratio rising. Thus, the markets are saying that deflation lies
ahead.
This is very important since as I've noted before, Ben Bernanke will not
tolerate deflation. Thus, this chart is telling us that tapering is not in
the cards. As deflation becomes more visible, I expect the world's
central banks to battle against it with ever-greater portions of
quantitative easing. This, of course, will set off a bull market in gold
and silver.”
x
Investing in Treasuries at their currently artificially depressed yields is
playing with fire. It is one of the wonderful ironies of the English
language that the word “taper” not only means to “gradually withdraw”
but is also a noun used to describe a long, thin candle or a long, waxed
wick used to light candles or fires.
Gold remains an insurance policy against the inevitable decline of the
fiat paper standard. There is far too much debt in the world that can
never be repaid in constant dollars. This debt can only be repaid in one
of three ways: (1) partially, which means through defaults and
restructurings (see, for example, Greece, Cyprus); (2) through inflation;
and (3) through currency devaluation. The global economy is simply
incapable of generating sufficient income to service and then repay the
trillions of dollars of debt on the balance sheets of the central banks not
to mention all of the other public and private sector debt, nor the
hundreds of trillions of dollars of future entitlement obligations of its
governments. In the end, paper money will continue to be devalued
and gold will be the beneficiary of that phenomenon. I would be
perfectly comfortable adding to gold positions at this level as a
long-term trade, and would strongly advise investors who do so to
purchase phy sical gold.
For much of the time since 2008, the more debt the Fed purchased, the
lower interest rates went. But something has changed. Since the
beginning of 2013, rates are beginning to move up. The key question:
Is the Fed losing control?
Ponzi scheme: US Treasury print bonds. Fed prints money to buy those
bonds. Fed earns interest on those bonds. Fed returns the interest
payments to the Treasury.
Warning sign: the Fed is having to buy the lion's share of US debt as
foreigners are no longer buying.
Trouble in the bond market is most destructive than trouble in the stock
market, as the bond market is MUCH bigger.
If our credit rating is damaged again by another debt ceiling debacle,
that will raise interest rates and accelerate the collapse of the bond
bubble.
If you look at private+public debt for the world's largest countries, it
has been growing fast -- it's now about 30% higher since 2008. This
number doesn't include emerging market debt, which has doubled
since 2008.
The key takeaway here? The problem of debt constraining economic
growth is worldwide. And moving fast in the wrong direction.
Former Energy Secretary Spencer Abraham is being piped in via
teleconference. Sees lots of opportunities for domestic production of
energy in the US. Optimistic at how % of US oil imports have declined
from 70% to under 50%. Sees a day when US talks about exporting its
oil (crude).
Sees the future of coal in the US as export-driven. Coal plants will be
shut down over time by high costs, but raw coal will be exported to
developing world. (Abraham is a bit of a cheerleader for the fossil
energy industry)
New topic. Shale oil is not cheap oil. Production costs are now $80/bbl.
Where are oil prices headed?
We use a billion barrels of oil every day around the globe. 1,000 barrels
a second. That demand is only going to go higher. $200/barrel oil is
coming. Oil is going to price itself out of the market. If we use every bit
of energy we can, we're going to come up short. Oil is the best
transportation fuel we have - its going to be hard to supplant. Nuclear
is probably the only fuel that could (eventually) replace oil.
If you ever see a piece of legislation, look at the title. It will tell you
everything you need to know if you just read it as the opposite of what
it's named. (lots of laughs about the "Affordable Care Act")
The current shutdown is just drama and a charade. It looks likes there's
2 parties fighting, but it's actually just 1 party. Would be good to have
a 2nd party in there (laughs).
Our foreign policy is backwards and makes the world less safe for
Americans and everyone else.
The process in America is owned and operated by moneyed interests:
banking system, military industrial complex, health care complex.
x
France had almost no unemployment in the 30 years after the war?”
wife Elizabeth began.
“Then, after Mitterrand, unemployment rates were always high.”
“Hmmm…”
“Chirac, Sarkozy, Hollande – every president promises to create jobs.
Apparently, they’re not very successful. And small wonder. Mitterrand
put in place so many laws to protect working people. Now, who wants
to hire people in France? It’s so expensive.”
x
the US government faced a similar predicament in the summer of 2011.
Just like today, it was bumping up against the debt ceiling, r
Stocks
As I mentioned, stocks fell off a cliff during debt ceiling 1.0. Most
financial pundits at the time chalked that up to the supposed threat of
default by the US government, a line of reasoning we now know is dead
wrong, for one simple reason: bonds soared during debt ceiling 1.0.
Treasuries—the last asset you'd want to own if you were worried about
a US default—rallied to multiyear highs.
Fast forward to today, and the media is again warning of default. Not
gonna happen. What will happen, just like last time, is Republicans in
Congress will push us close to the edge, watch Democrats squirm, then
strike a deal that includes a few goodies for themselves at the last
minute. It's the classic "Never let a good crisis go to waste" gambit that
both parties use on each other whenever they get a chance.
It's silly to expect otherwise. One thing we can always count on
politicians to do is act in their own best interest. Allowing the US to
default would enrage voters, especially the ones who depend on
government money to survive, like seniors and welfare takers.
Alienating the voting base by allowing a default would be the dumbest
political career move in history, narrowly defeating Anthony Weiner's
decision to purchase a camera phone.
“Of course the Fed couldn’t taper. The US is spending $1.2 trillion
each year, on balance sheet, more than they are taking in. They have
to find $1.2 trillion. It turns out they could hoodwink the credit
markets for about $700 billion of that, which leaves them $500 billion
short. The way they make up the $500 billion is they print it. It’s a
really good deal if you can get away with it, I don’t blame them.
x
The grand old man of the New York Federal Reserve bank’s gold
department, the last Mohican, John Exter explained the devolution of
money using the model of an inverted pyramid, delicately balanced on
its apex at the bottom consisting of pure gold. The pyramid has many
other layers of asset classes graded according to safety, from the
safest and least prolific at bottom to the least safe and most prolific
asset layer, electronic dollar credits on top. (When Exter developed his
model, electronic dollars had not yet existed; he talked about FR
deposits.) In between you find, in decreasing order of safety, as you
pass from the lower to the higher layer: silver, FR notes, T-bills,
T-bonds, agency paper, other loans and liabilities denominated in
dollars. In times of financial crisis people scramble downwards in the
pyramid trying to get to the next and nearest safer and less prolific
layer underneath. But down there the pyramid gets narrower. There is
not enough of the safer and less prolific kind of assets to accommodate
all who want to devolve. Devolution is also called flight to safety.”
x
x
Eventually, it is so tangled that it cannot be untangled. Like the Gordian
knot, it must be cut…
x
Qwerty keyboard
x
The Dead-Horse Theory of Bureaucracy
The tribal wisdom of the Plains Indians, passed on from generation to
generation, says that "When you discover that you are riding a dead
horse, the best strategy is to dismount."
However, in government more advanced strategies are often employed,
such as:
1. Buying a stronger whip.
2. Changing riders.
3. Appointing a committee to study the horse.
4. Arranging to visit other countries to see how other cultures ride dead
horses.
5. Lowering the standards so that dead horses can be included.
6. Reclassifying the dead horse as living-impaired.
7. Hiring outside contractors to ride the dead horse.
8. Harnessing several dead horses together to increase speed.
9. Providing additional funding and/or training to increase the dead
horse's performance.
10. Doing a productivity study to see if lighter riders would improve the
dead horse's performance.
11. Declaring that as the dead horse does not have to be fed, it is less
costly, carries lower overhead and therefore contributes substantially
more to the bottom line of the economy than do some other horses.
12. Rewriting the expected performance requirements for all horses.
And, of course...
13. Promoting the dead horse to a supervisory position.
X
After a modestly weak start, India's FX and stock markets accelerated
lower overnight in the currency's second biggest daily collapse in 17
years, and stocks second biggest daily plunge in 2 years. Rubbing
further salt into an already gaping wound of capital outflows, S&P
re-iterated its downgrade threat overnight following India dismal PMI
print and this appears to have pushed the Indian government to Plan D.
Following the failure to halt outflows of Plan A (status quo and blame it
on the Fed/Speculators), Plan B (well something is up so 'capital
controls' on FX and tariffs on gold), Plan C (that's not working so let's
confiscate people's gold), the Indian government is trial-ballooning
Plan D - ditch the USD for trade-payments (especially oil which is up
50% in INR terms in 4 months).
Just when you thought it was safe to dip your fast-money toe back into
Emerging markets...
Last night's INR collapse was dramatic to say the least as was the stock
market's 3.8% collapse...3 sep
Gloom, Boom, and Doom's Marc Faber pulls no punches in this brief
interview on CNBC's Futures Now. When asked what is the catalyst for
the crash he expects in US equity markets (following crashes in various
markets around the world), he shocks a stunned anchor looking at
equity markets near all-time highs with some ugly truths - "interest
rates are no longer a tail-wind, earnings growth is not there, and
emerging economies are collapsing (so no global growth
x
Reasonable people can disagree over what forces have driven the stock
market to all-time highs. But no one denies the centrality of earnings to
stocks, and for good reason: the whole point of investing in stocks is to
share in a stream of future earnings.
So, since stocks are doing great, earnings must be doing at least very
well. Are they?
My answer is no. I think the market is pricing in an unrealistic forecast
of future earnings that is unlikely to play out. This, in my judgment, is
the weakest link in the current positive stock market narrative—the
Fed's potential QE exit notwithstanding.
It might surprise you to learn that earnings growth has been essentially
nonexistent over the last few quarters, including Q2. Despite that fact,
consensus estimates predict earnings growth to resume later this year
and accelerate into 2014.
The chart below shows how estimates for Q3 have evolved over the
past month:
What's troubling is that even with these downward adjustments to Q3
expectations factored in, estimates for the second half of the year still
represent a material acceleration in growth from the first half,
particularly for sectors other than finance.
You can see that the loftiest of expectations are for Q4 2013:
To provide further context, the following charts illustrate quarterly
earnings totals (and projected totals) instead of just the growth rates:
As you can see, earnings are already at an all-time record level. But
they are expected to go much higher in the last quarter of the year.
Further, 2014 isn't pictured, but those expectations are even loftier:
consensus expectations are for earnings to grow +11.3% in 2014, and
+11.9% for all sectors excluding finance in 2014.
How Realistic Are These Expectations?
I don't think these expectations will pan out. Here's why.
Earnings grow for only two reasons—revenue growth and/or margin
expansion. Unfortunately, the outlook on both fronts is problematic.
Margins are already at cyclical peak levels—the best that can be
expected on that front is for margins to remain stable.
That leaves revenue gains as the only driver for earnings growth. But
you can't have significant revenue gains in the current environment of
constrained economic growth. Revenue growth is a direct function of
nominal GDP growth, and nominal GDP growth has been lukewarm at
best.
The US economy is actually in better shape than most of its trading
partners, particularly in the developed world, as the recent positive
revision to second-quarter GDP confirms. But Q2's +2.5% GDP growth
notwithstanding, the reality is that US economic growth has barely
been above the +2% level for the past many years. And the situation
abroad has been even weaker.
Bottom line: it's hard to envision companies, particularly outside of
finance, growing their revenue significantly in the coming quarters
amid tepid economic growth.
x
“And as one Emperor after another bankrupted the treasury through
foreign wars, palatial opulence, and unaffordable social welfare
programs, Rome gradually changed for the worse.
Desperate to keep the party going, later Emperors debased the
currency to the point of hyperinflation. They imposed wage and price
controls under penalty of death. They raised taxes so punitively that
people simply quit working altogether.
With each successive emperor, Romans would foolishly believe that the
‘new guy will be different’ and that things would improve. Of course,
apart from the occasional sage, Rome’s political leadership became
more destructive.”
“This is a familiar story. Empires throughout history have always gone
through this life cycle of rise, peak, decline and collapse. Rome. Egypt.
The Hapsburg Empire. The Ottoman Empire.
And the salient points are always the same – out of control government
spending, a rapidly debased currency, costly foreign military
campaigns, burdensome regulations, etc.”
“Meanwhile, the ‘richest’ countries in the world (US, Europe, Japan,
etc.) are so deeply in debt that they have to borrow money just to pay
interest on the money they’ve already borrowed.”
This isn’t rocket science. Predicting the end of this system is not
attention–seeking sensationalism; it’s just common sense.”
It is easy to see that many western governments are following
essentially the same path as Rome’s road to self-destruction. Rome’s
status quo was increasingly expensive to support and eventually failed.
Is the status quo in Europe or the United States likely to experience a
different fate?
Bridgewater estimates that if France were judged solely on its
fundamentals, its spread to Germany should be about 3.5% rather
than the current 50 basis points. If that kind of differential were
realized by the marketplace, France would have no hope, under the
current regime, of getting its deficit under 3%, let alone below nominal
GDP growth, which is the more important number.
Like the peripheral Eurozone countries, France has started to run a
significant trade deficit. Without going into the math, in very general
terms, you cannot reduce your debt and run a trade deficit the same
time. That has been one of the key problems in Greece, Portugal, Spain,
and Italy. Restructuring a trade deficit is painful in that it requires
either a downward currency adjustment or a reduction in labor costs
(or an increase in labor productivity). When currency devaluations are
not possible, the adjustment is typically borne on the shoulders of
workers in the form of reduced wages and layoffs. That of course
means lower tax revenues and larger deficits, coming at a time when
they are the most difficult to handle. France has simply become
uncompetitive. New businesses are not being created, and existing
businesses are leaving. Admittedly, Brussels has not been helping, with
the imposition of a slew of new mandates that are increasing costs
relative to the rest of the world. Google "French chicken crisis" and
"French egg protests" to see why exports are down. French poultry
exports have fallen from €1.2 billion to less than €200 million in about
10 years.
French government spending is already at 56% of GDP, and
debt-to-GDP is over 90%. At what point will the market begin to worry
about a debt trap? How much more can you tax? And do you really
want to raise taxes with the economy as weak as it is? You can't print
money without the agreement of Germany and the rest of the
European Union. Cutting spending by 4 to 5% over the next few years
will result in a far more serious recession than what you've been
experiencing. (Just ask Greece or Spain.)
And then there are the European bank stress tests that are scheduled
for early 2014. These have been postponed so that the ECB can do its
own analysis, but the time for them is fast approaching. Regulators
want to have a uniform methodology across the Eurozone for
calculating bad loans, which will keep banks from using "local
practices" to hide bad debts. Further, it is not yet clear how the new
bank stress tests will treat sovereign debt. Heretofore, sovereign debt
in Europe has been considered risk-free, and banks have levered up as
much as 40 to 1 on sovereign debt. Portuguese banks, for instance,
don't have to reserve against the purchase of Portuguese debt, and
neither do Italian or Spanish banks when they purchase their own
country's debt. Any modest restructuring of national debt will result in
massive bank insolvencies, not just in the peripheral countries but
throughout Europe.
There is some talk of beginning to require reserves against sovereign
debt, but this would mean that banks would have to raise significant
amounts of capital in order to bring their required Tier 1 ratios into
compliance. Good luck raising the tens of billions of euros that would be
required in the present market environment.
The bank stress tests that were administered a few years ago were a
joke, and everybody knows it. It was all wink, wink and nod, nod and
figure out how to finesse the obvious. In order to sustain any credibility,
the next round of stress tests will have to be far more serious. How the
new regulatory regime of the ECB deals with sovereign debt will to a
great extent tell the world how serious they are about stress testing.
After Greece, and after looking at the ongoing problems of Portugal
and Spain (and especially Spanish banks), who can say with a straight
face that there is absolutely no risk in sovereign debt? But if there is
some risk, then there must be reserves against it.
Indulge me for a moment as I offer a very speculative but interesting
scenario. German exporters would like to see a weaker euro, but
Germany does not want to allow the European Central Bank to print
money. However, German leaders recognize that at some point, if the
Eurozone is to maintain a currency union, it must also have a fiscal
union. A breakup of the Eurozone would be disastrously expensive for
everyone but especially for Germany. There will be a live-or-die effort
by all parties to maintain the euro. If Germany and the other fiscally
sound members of the European Union can persuade the peripheral
countries to adopt rules that require fiscal restraint in return for
mutualization of debt, then that would allow the ECB to monetize
deficits in the interim—and thus potentially weaken the euro.
This scenario would require members of the Eurozone to give up a
great deal of their fiscal autonomy to Brussels. This will become the
central question with regard to the existence of the euro within a few
years. In an odd sort of way, the Eurozone is going to enter into its own
internal currency war as the peripheral nations continue to have debt
problems.
The situation will be exacerbated by the fiscal crisis that will soon
engulf France. It will come precisely at the moment when Germany will
be asked to allow the ECB to accommodate the French bond market, as
it has done for Italy and Spain, and when France will in turn be asked
to enter into a period of austerity, as both Italy and Spain have done
(very painfully). It is at that moment that the ultimate survival of the
euro will be decided.
x
The major difference, of course, is the changed role of the Federal
Reserve. In the 1930s, the Federal Reserve was a reactive organization
which would lend money against good collateral at a penalty to avoid a
liquidity crunch. Today, on the other hand, the Federal Reserve is a
proactive organization tasked with managing the economy. Specifically,
the Federal Reserve is mandated to avoid deflation at all cost.
This means that all outstanding financial liabilities with a negative NPV
must be monetized in order to elude a cascading debt deflation that
would occur were the market left to itself.
In the 1930s, the mainly fiscal and regulatory policy responses stopped
the economy from correcting excesses. Today, policy makers are
leaning much more toward an activist monetary policy to sort out the
mess. The buildup was similar; the response by the Fed is different.
While we see the merit in both schools of thought, until we see some
semblance of evidence to the contrary, we believe the Federal Reserve
will err on the side of too much inflation that at some point will spin out
of control.
Conclusion
The idea that a social system should be deprived of volatility creates
perverted incentives which firmly place the system on a path to
self-destruction. In terms of leverage levels, it allows extremes to be
reached.
We are currently at the peak of a 60-year-old debt supercycle that is
imploding before our eyes. The question we need to ask ourselves is
what this implosion will look like. When a system is managed to the
extent it is today, a free float of market forces would undoubtedly lead
to a massive liquidation of outstanding debt.
However, a proactive central bank coupled with a political elite that find
it expedient to rely on monetary manipulation rather than structural
reforms is historically a well-trodden path toward rampant inflation.
It all comes down to this: Do you think the Federal Reserve has the
political will to monetize trillions in bad debt? If yes, then you need to
invest for inflation, i.e., buy precious metals, real estate and other hard
assets. On the other hand, if you think the Federal Reserve will stand
by and allow the undeniable deflationary force to get the upper hand,
you should be long cash and bonds.
X
The more Asia adds to its holdings of U.S. debt, the harder they
become to unload. If traders got even the slightest whiff that China
was selling large blocks of its $1.3 trillion in dollar holdings, markets
would quake. The same goes for Japan’s $1.1 trillion stockpile. So
central banks just keep adding to them. Pyramid scheme, anyone?
Never before has the world seen a greater misallocation of vast
resources. Loading up on dollars helps Asia’s exporters by holding
down local currencies, but it causes economic control problems. When
central banks buy dollars, they need to sell local currency, increasing its
availability and boosting the money supply and inflation. So they sell
bonds to mop up excess money. It’s an imprecise science made even
more complicated by the Federal Reserve’s quantitative-easing
policies.
x
Banks are greedy enterprises. (Go figure.) So historically, they would
loan out every penny they could.
For reference, between 1929-2007, excess reserves averaged just
0.5% of GDP.
Today, things are a little different... The $2 trillion in excess reserves is
12.4% of GDP.
Why did excess reserves start jumping in 2008? Why aren't banks
lending money? It's not because they're less greedy.
The answer lies with the Fed, which is actually paying them interest not
to lend. Bernanke prints even more money to pay 0.25% on all excess
reserves -- something they started doing only in 2008.
So "you're trying to convince us that the banks are happy making
money at a quarter of a percent interest?" pressed our indignant reader.
"And that banks are enticed somehow to make a quarter of a percent
interest on larger and larger pools of money?"
In a word, yes.
A quarter of a percent may seem like peanuts, but in today's
environment, it's the most liquid way to get a risk-free return on $2
trillion. And when the time is right, Bernanke has pledged to pay higher
rates of interest on excess reserves, instead of buying bonds and
tightening monetary policy. But that will only make the situation worse,
as it will increase the already massive amount of excess reserves -- the
key to looming inflation in the first place.
When the banks start loaning, the cat will be out of the bag, and the
Fed won't be able to stop it without causing another recession. The
fuse to the inflation bomb has already been lit... the wick is simply
longer than people thought it was.
According to the IMF's overview, global growth was less than expected
in the first quarter of 2013, at just over 3%, which is roughly the same
as 2012. The lower-than-expected figures were driven by significantly
weaker domestic demand and slower growth in emerging-market
economies, a deeper recession in the euro area, and a slower US
expansion than anticipated. The report concludes that the prospects
for the world economy remain subdued.
x
Making matters worse is that the devices for paring down the amount
of cash that you need for the sake of convenience—such as credit cards,
ATMs and online banks—are now far more widely available and
cheaper to use than they were in the 1970s. When price inflation
becomes noticeable, people will turn more and more to those devices
to reduce their holdings of value-leaking cash. That drop in the demand
for money will reinforce the price inflation that originated in the Federal
Reserve's increase in the supply of money.
x
Murray Rothbard describes this phenomenon on Page 40 of his great
book What Has Government Done to Our Money?:
"...[inflation] will lead to a decline in the quality of goods and of service
to consumers, since consumers often resist price increases less when
they occur in the form of downgrading of quality."
Decreasing quality, with rising prices. That's stealth inflation. And no
one -- not even the great monetary wizard Ben Bernanke himself -- can
deny that stealth inflation's a real problem.
Take a look at Kimberly-Clark Corp., makers of Kleenex and other
consumer products. A recent article in the Wall Street Journal points
out that they've quietly... slowly... been "de-sheeting."
What is de-sheeting?
De-sheeting is the reduction in the number of sheets of toilet paper or
tissues in each package while holding retail prices constant.
You see, you used to have to buy a box of Kleenex's every 50 sneezes.
But now you're only afforded 45 sneezes. Then you need a new box.
But the price of that box has stayed the same.
The beauty of the de-sheeting process is that it is very hard for
consumers to detect. The product development team at Kimberly-Clark
works to make sure that the consumer does not notice a reduction in
quantity.
And they aren't the only ones.
The article mentions two other large consumer goods manufacturers:
Procter & Gamble and Georgia-Pacific. All of these big players engage
in a similar strategy.
Package shrinkage, weight reduction and ingredient modification are
all ways producers of consumer goods can reduce quality but maintain
stable prices.
The Wall Street Journal comments on this trend of package shrinking
and de-sheeting. They remark that this process is done "as an
alternative to hiking prices in the face of higher raw material costs."
We can even see the direct effects of this in the recent earnings
released by Kimberly-Clark.
Their reported profit rose 5.6%, to $526 million. Yet sales stayed flat at
$5.3 billion. This is where the stealth inflation comes into play.
It is a last-ditch effort for these large companies to meet -- and exceed
-- Wall Street analyst estimates.
For big blue chip investors, beware. These big companies have already
cut fixed costs to the bone. They've fired workers. They've outsourced.
And now they're using stealth inflation to goose their numbers even
further.
But stealth inflation goes only so far. Eventually, profits of these
toothpaste, toilet paper and tater chip companies will stagnate.
Economist and Boston University Professor Laurence Kotlikoff has long
been recognized as an expert on government finances.7 Based on the
2013 Trustees Report on Social Security’s longrun finances, he finds
that the “infinite horizon” fiscal gap for social security alone (the
difference between the present value of all future promised benefits
and tax revenues) is around $23.1 trillion. To put these numbers into
context, the U.S. GDP for this year is forecasted to be a bit more than
$16 trillion.
Professor Kotlikoff in his website calculates that to fully eliminate the
shortfall in Social Security funding, the government would need to
either cut all present and future social security benefits by 22%, or
increase the Federal Insurance Contributions Act tax (FICA) by 32%
(from 12.4% to 16.4%). But this is just to fix Social Security!
For the U.S. Federal Government as a whole, Kotlikoff estimates the
fiscal gap to be around $222 trillion! This is many orders of magnitude
larger than GDP. In order to wipe out this gap, the Federal Government
would need to permanently increase all taxes by 64% or reduce all
expenditures (with the exception of debt servicing) by a whopping
40%.
Say’s Law, however, tells us that “products are paid for with products”
– you have to produce things in order to be able to buy things. That is
normally true. But not when you’re printing up the world’s reserve
currency. Then you have the exorbitant privilege of needing only to
produce “money.”
x
Recall, from 1998-2008, the country's inflation rate went from 32% to
11,200,000% (that's not a misprint). Zimbabwe, under President
Robert Mugabe, was the world's leading inflator. It destroyed their
currency, the "Zim dollar." The man who oversaw that instability was
Gideon Gono, the president of the Reserve Bank of Zimbabwe (RBZ).
A year later, Gono was awarded the Ig Nobel Prize in Mathematics -- a
gag award organized by the Annals of Improbable Research. He won
for "giving people a simple, everyday way to cope with a wide range of
numbers -- from very small to very big -- by having his bank print bank
notes with denominations ranging from one cent ($0.01) to one
hundred trillion dollars ($100,000,000,000,000)."
The Zim dollar was devalued a total of four times. The fourth time,
Gono simply removed 12 zeros from the currency. Soon after, the Zim
dollar was indefinitely suspended. Now Zimbabwe trades in the U.S.
dollar, the euro, the South African rand and Botswana's pula.
Despite the mayhem, five years on, Mugabe is still in power and facing
elections this month. If past Zimbabwean elections are a guide... he'll
once again win by a landslide. And Gono? He's still at the RBZ wrapping
up his latest five-year term and surely thanking God Zimbabwe's not a
meritocracy.
Gono, if you haven't heard of him, is Robert Mugabe's right-hand man.
And Robert Mugabe is the No. 1 man in Zimbabwe, an African country
with a real "riches to rags" story. It was one of the wealthiest and
safest countries in Africa when it was run by Ian Smith in the '70s. But
the meddlers and world improvers couldn't leave well enough alone.
They helped put Mugabe in power. Since then, the place has gone to
hell.
Gideon Gono, 53 years old, lives in a 112-room mansion in Harare. He
says he doesn't drink, sleeps only four hours a night and runs regularly.
He is known as "Mr. Inflation" for his Olympian efforts to increase the
country's money supply. He did this the old-fashioned way -- by
printing pieces of paper will lots of zeros on them.
Between August 2007 and June 2008, the Zimbabwean money supply
increased 20 million times. Naturally, this led to the kind of spectacular
increases in consumer prices that modern economists had seen only on
newsreels. Consumer price inflation was clocked at 2,000,000%. Six
months later, it sped up to 230,000,000%.
Of course, Mr. Gono rolled out all the usual inflation-fighting measures
-- all, that is, except for the one that works. Mr. Gono personally went
around, found shop owners who had illegally raised prices and had
them arrested. Bank withdrawals were limited to 500,000 Zimbabwe
dollars per day. If you wanted to buy 2 kg of sugar, for example, you
had to stand in line for four days at an automated teller. But at those
rates, you could stand in line at the automatic tellers every day for
eternity and never get enough money to buy a drink of water.
We salute Mr. Gono. He may be a moron, but at least he's a useful one.
Better than another bad theory, he has provided a bad example. In an
age when central bankers all over the world are trying to avoid a
decline in the cost of living, Mr. Gono has proven that there are worse
things.
But despite Gono himself, Gonoism seems to be gaining admirers in the
rest of the world, because the alternatives don't seem to work.
Keynesianism, for example. The Keynesians say that when people stop
squandering their money, the feds have to step in and squander it for
them. Right now practically every government in the world is promising
huge new spending programs. Deficits be damned!
X
The recent World War Z by Brad Pitt is entertaining, thrilling and fast-moving, which
I would recommend to anyone who enjoys zombie movies, on top of George
Romero’s classic zombie films.
Although economic zombification receives little attention, its effects
could be as important as monetary policy, fiscal deficits and structural
reforms.
We wish Hadas had not used the term "zombies" to describe
slow-growing economies. "Zombification," properly used, refers to the
way in which, over time, more and more people figure out how to get
something for nothing.
Europe's zombie banks
And by 2007, the United States economy had reached the
extraordinary point (outside of a major war) where the government
was consuming a full 35% of the economy. That is, government
spending amounted to 35% of the economy, and 65% was the private
sector.
This resulted in a massive and unprecedented shift in spending as the
government soared in size, even as simultaneously the private sector
was collapsing in size. So the economy nearly instantly shifted from
being 35% government and 65% private, to being 43% government
and 57% private – a level which remains in approximate terms true
today.
So when we look at these fantastic levels of deficits that have been
consistently coming in at well over $1 trillion per year, what we have in
fact been seeing is the increase in the size of the government from
35% to 43% of the overall economy, in order to maintain the facade of
an intact economy.
In other words, since the fall of 2008, a substantial chunk of the US
economy has been "artificial". The private-sector imploded. It has not
recovered to this day. And the great majority of damage containment
has been dependent on the United States government running
unsustainable deficits, of which it lacks the ability to pay back under
ordinary circumstancnes.
X
Thomas Edison, the inventor of the lightbulb, fell hard for direct current (DC)
electricity. A Serbian inventor named Nikola Tesla came to work for Edison and
developed alternating current electricity (AC) under Edison’s supervision. Tesla
argued that unlike direct current, alternating current could not only illuminate
lightbulbs over greater distances, it could also power gigantic industrial machines
using the same electrical grid. In short, Tesla claimed that the modern world required
AC—and he was right. Only AC could provide the scale and scope needed for
extensive use of electricity.
Edison, however, was so protective of his creation that he dismissed Tesla’s ideas as
“splendid, but utterly impractical.” Edison could have had the patent for AC since
Tesla had worked for him when he invented it, but his love for DC was too strong.
Edison set out to discredit AC as dangerous, which indeed at the time it was. The
worst that could happen to anyone who touched a live DC wire would be a powerful
shock—jolting, but not lethal. Touching a live wire running AC, on the other hand,
could kill instantly. The early AC systems of the late nineteenth century in New York
City were made up of crisscrossed, overhanging, exposed wires. Repair workers had
to cut through dead lines and reconnect faulty ones without adequate safeguards
(which modern systems now have). Occasionally, people were electrocuted by
alternating current.
A manager’s experience of the world, political view, religious view, market view,
world view, … cause him/her to create some thesis about the markets to enable
him/her to deal with the blizzard of information that he/she face.
Once we adopt a certain thesis, if we are not careful, we will tenaciously defend it and
dismiss all evidence to the contrary.
 Actively seek the opposite view.
x
Worse yet, none of this happens in a vacuum. If the Fed's policy
manipulations were limited to the U.S. economy, that would be one
thing, but they are not. The effects of printing dollars are global; by
engaging in quantitative easing, the Fed has effectively declared
currency war on the world. Many of the feared effects of Fed policy in
the United States are already appearing overseas. Printing dollars at
home means higher inflation in China, higher food prices in Egypt and
stock bubbles in Brazil. Printing money means that U.S. debt is
devalued so foreign creditors get paid back in cheaper dollars. The
devaluation means higher unemployment in developing economies as
their exports become more expensive for Americans. The resulting
inflation also means higher prices for inputs needed in developing
economies like copper, corn, oil and wheat. Foreign countries have
begun to fight back against U.S.-caused inflation through subsidies,
tariffs and capital controls; the currency war is expanding fast.
While Fed money printing on a trillion-dollar scale may be new,
currency wars are not. Currency wars have been fought before -- twice
in the twentieth century alone -- and they always end badly. At best,
currency wars offer the sorry spectacle of countries stealing growth
from trading partners. At worst, they degenerate into sequential bouts
of inflation, recession, retaliation and actual violence as the scramble
for resources leads to invasion and war. The historical precedents are
sobering enough, but the dangers today are even greater,
exponentially increased by the scale and complexity of financial
linkages throughout the world.
x
Prakash Loungani of the International Monetary Fund wrote very
starkly, "The record of failure to predict recessions is virtually
unblemished." He found this to be true not only for official
organizations like the IMF, the World Bank, and government agencies
but for private forecasters as well. They're all terrible. Loungani
concluded that the "inability to predict recessions is a ubiquitous
feature of growth forecasts." Most economists were not even able to
recognize recessions once they had already started.
Central banks say they will know the right time to end the current
policies of quantitative easing and financial repression and when to
shrink the bloated monetary base. However, given their record at
forecasting, how will they know? The Federal Reserve not only failed to
predict the recessions of 1990, 2001, and 2007, it also didn't even
recognize them after they had already begun. Financial crises
frequently happen because central banks cut interest rates too late and
hike rates too soon.
Trusting central bankers now is a big bet that (1) they'll know what to
do, (2) they'll know when to do it. Sadly, given the track record, that is
not a good wager. Unfortunately, the problem is not that economists
are simply bad at what they do; it's that they're really, really bad.
They're so bad that it cannot even be a matter of chance. The
statistician Nate Silver points this out in his book The Signal and the
Noise:
Indeed, economists have for a long time been much too confident in
their ability to predict the direction of the economy. If economists'
forecasts were as accurate as they claimed, we'd expect the actual
value for GDP to fall within their prediction interval nine times out of ten,
or all but about twice in eighteen years.
In fact, the actual value for GDP fell outside the economists' prediction
interval six times in eighteen years, or fully one-third of the time.
Another study, which ran these numbers back to the beginning of the
Survey of Professional Forecasters in 1968, found even worse results:
the actual figure for GDP fell outside the prediction interval almost half
the time. There is almost no chance that economists have simply been
unlucky; they fundamentally overstate the reliability of their
predictions.
So economists are not only generally wrong, they're overly confident in
their bad forecasts.
If economists were merely wrong at betting on horse races, their
failure would be amusing. But central bankers have the power to create
money, change interest rates, and affect our lives in multiple ways –
and they don't have a clue.
Despite this, they remain perennially confident. There's no
overestimating the hubris of central bankers. On 60 Minutes in
December, 2010, Scott Pelley interviewed Fed Chairman Ben Bernanke
and asked him whether he would be able to do the right thing at the
right time. The exchange was startling (at least to us):
Pelley: Can you act quickly enough to prevent inflation from getting out
of control?
Bernanke: We could raise interest rates in 15 minutes if we have to. So,
there really is no problem with raising rates, tightening monetary policy,
slowing the economy, reducing inflation, at the appropriate time. Now,
that time is not now.
Pelley: You have what degree of confidence in your ability to control
this?
Bernanke: One hundred percent.
There you have it. Bernanke was not 95% confident, he was not 99%
confident – no, he had zero doubts about his ability to know what is
going on in the economy and what to do about it. We would love to
have that sort of certainty about anything in life.
The nearsightedness of economists is nothing new. In 1994 Paul
Ormerod wrote a book called The Death of Economics. He pointed to
economists' failure to forecast the Japanese recession after their
bubble burst in 1989 or to foresee the collapse of the European
Exchange Rate Mechanism in 1992. Ormerod was scathing in his
assessment of economists: "The ability of orthodox economics to
understand the workings of the economy at the overall level is
manifestly weak (some would say it was entirely non-existent)."
In December 2007 a Businessweek survey showed that every single
one of 54 economists surveyed actually predicted that the US economy
would avoid a recession in 2008. The experts were unanimous that
unemployment wouldn't be a problem, leading to the consensus
conclusion that 2008 would be a good year.
As the global financial meltdown unfolded, Chairman Bernanke, too,
continued to believe that the US would avoid a recession. Mind you, the
recession had started in December 2007, yet in January '08 Bernanke
told the press, "The Federal Reserve is not currently forecasting a
recession." Even after banks like Bear Stearns needed to be rescued,
Bernanke continued seeing rainbows and candy-colored elves ahead
for the US economy. He declared on June 9, 2008, "The risk that the
economy has entered a substantial downturn appears to have
diminished over the past month or so." At that stage, the economy had
already been in a recession for the past six months!
x
The Swedish model, in which balance sheets are rebooted through
bankruptcy and orderly default, can take effect more immediately,
writing down debts for households and salvageable financial
institutions while eliminating poorly functioning banks by wiping out
their investors and creditors. In the U.S. tax code, these actions are
known as Chapter 11 and Chapter 7 bankruptcies, respectively. The
Swedish model is the textbook prescription for eliminating zombies,
and it illustrates the benefits and usefulness of orderly bankruptcy. The
cost is an immediate recognition of substantial losses concentrated
entirely on equity and bond investors. While personal bankruptcy
generally leads to a fresh start and greater future growth in the
standard of living, it can be psychologically traumatizing, and this
solution is shunned by some households.
The Finnish model involves rapid (but often temporary) currency
devaluation. This approach has proven to be effective for other
countries like Mexico, Argentina, Thailand, and other Southeastern
Asian countries. The massive devaluation can be interpreted as a
marking down of all domestic assets and debt in global currencies—a
decline of 30% in currency value, in one fell swoop, reducing the debt
burden by 30% in international terms and at the same time increasing
the international rent on exportable factors of production. This method
reduces domestic consumption in favor of exporting, pushes
internationally uncompetitive wages down, subsidizes the export
oriented industries, and marks down savings and the inflated nominal
wealth that has been stored in real estate. This sequence of "price"
re-alignment through the currency channel eliminates the "economic
drag" associated with downward rigidity in wages and real estate prices
(both of which result from the domestic real estate bubble underlying
the balance sheet crisis). At the same time, the Finnish model
significantly resets the debt burden of the zombies. The depressed
currency and therefore the subsidy from holders of domestic cash and
assets to debtors and exporters (firms and workers) will continue until
the impaired balance sheets are repaired.
Each of the possible solutions is harrowing: the housing price decline
destroyed wealth, and there is simply no magical government program
for restoring wealth painlessly. Moving money from asset rich
households and firms to subsidize the indebted does not increase
overall wealth and can often exacerbate the problem, especially if it
means prolonging the zombie apocalypse. While the government does
not get to create wealth out of thin air through transfers (much as it
might like to claim such a magical ability), it does get to choose when
and to whom the pain will be allocated.
x
But wait! What's this? In the face of all this good news, the US stock
market fell and "disaster insurance" gold rose. The Dow dropped 106
points. And the price of gold went up $12 per ounce.
Why? Because good news is bad news. Bad news is good news. Up is
down and backward is forward . Nothing is what it seems... or what it
ought to be.
If the economy were really doing better, the Fed would have to follow
through on its promise to "normalize" monetary policy. That is, it would
stop lending at zero interest rates and stop its $85 billion-per-month QE
program.
x
Along with this, however, we find speculators and investors, starved for
yield, chasing the junkiest of the junk. Indeed, the prices of these
"assets" have recently been driven to all-time record highs, which
means that their yields have hit record lows.
It was just over a year ago when Greece ten-year debt was yielding a
whopping 30%.
Oh yes, and let's not forget that just a year prior, more than $130 billion
had been lost by Greek bond investors, which created a ripple effect
across Europe, including recently crippling Cyprus' key banks.
Today? Greek ten-year debt is under 10%.
The real story here, about speculators – not ‘investors’ – returning to
Greece, is that the world is so utterly starved for yield that even Greek
debt seems reasonable now. In Greece, even as the trend towards
buying Greek debt was building, the country's economy (as measured
by unemployment and GDP) deteriorated sharply.
As compared to 2008, Greek GDP in 2012 shrank by 20%, and current
trends continue to show 5%-6% shrinkage in 2013:
Even single month, far more money leaves this country than comes
into it. In fact, the amount going out exceeds the amount coming in
by about half a trillion dollars each year. This is extremely
deflationary. Our system is constantly bleeding cash, and this is one of
the reasons why the federal government has felt a need to run such
huge budget deficits and why the Federal Reserve has felt a need to
print so much money.
x
VIX is telling us that fear – at least as it relates to stock prices – is dirt
cheap. With what we know about markets and human nature, we do
not expect fear to remain cheap forever.
VIX is the symbol for the Chicago Board Options Exchange (CBOE)
Volatility Index. It measures the volatility embedded into options
traded on the S&P 500 (SPX) and reflects investors' 30-day consensus
view of the future. S&P 500 puts grant the buyer the right, but not the
obligation, to sell the S&P 500 Index at a fixed price for a limited time.
VIX Measures Fear
The greater the investors' fear, the more they will pay for put option
protection. The more they pay, the higher the market volatility implied
in the cost of the S&P 500 options. This is what VIX measures. Since
fear is the strongest human emotion, it's no surprise that VIX rises and
falls in proportion to investor fear.
A VIX of 10.00% means option buyers only expect the market to move
10% in the foreseeable future. A VIX reading of 20.00% means option
traders expect the market to be twice as volatile. VIX does not measure
actual volatility; it measures traders' anticipated volatility, based on
how much they are willing to pay for protection against it. The VIX is
forward-looking, which means it can spike much higher than actual
market volatility.
The VIX tends to rise when investors either expect or experience big
market declines; it tends to fall as fear of those declines subsides. This
relationship can be seen clearly in the "Monthly VIX" chart below. Note
how VIX spiked to 89.00% during the Lehman crash while stocks
dropped a much smaller 58%.
Take a look at the long-term chart of the S&P 500 right below the
long-term chart of VIX and you'll see just how correlated these two
markets are. VIX tends to rise during a stock market fall, and to fall
when the market rises. Note how it tends to fluctuate in a well-defined
range, from a low of roughly 9% to a high of approximately 45%. (I
ignore the Lehman crash spike in VIX to nearly 90% as a "one off" –
unlikely to happen again anytime soon.)
By measuring expected volatility, VIX also measures probability. A
reading of zero assumes an absolutely flat stock market with no
volatility at all. While theoretically possible, that kind of market
condition is extremely improbable. This is why VIX has a practical floor
at around 9.00% – it is reasonable to assume that stocks as a whole
could fluctuate this much in even quiet market conditions. Similarly,
VIX rarely climbs above 45.00% because the chances of the market
staying that volatile for any length of time are slim.
The thick blue line on the long-term chart above shows multi-decade
support in VIX just above 9%. The thick gold line (representing the
276-month moving average of VIX) is a close approximation of the
"mean" of expected volatility. It covers almost every conceivable
market scenario – bull markets, bear markets, and numerous
"crashes." Like the water skier in our metaphor, VIX crisscrosses this
"wake" of expected stock market volatility and either reverts to it, or
close to it, nearly every year.
Will it do so again this year? Only time will tell. However, with VIX close
to its practical low of 9% (currently 12.22%) and the public getting
more complacent and starting to pile back in to stocks, now may be a
good time to consider adding a bit of fear to one's portfolio. We
recommend our trading customers consider doing precisely that.
x
Studies show that the closer you are to the equator, the more
present oriented you are. The more you are in a place where the
weather does not change all that much, the more you get a sense of
sameness. Interestingly, there are words for was and is in the Sicilian
dialect, but no will be. Present oriented indeed!
The purpose of school, Zimbardo notes, is to turn present-oriented
little beasts into responsible future-oriented children. The problem in
the United States is that a child drops out of school every nine
seconds.
Everyone is all upset about such a lack of future orientation.
But adult voters show a similar lack of future orientation. We much
prefer to vote for benefits that increase our deficits. Even in good
times,
we do not pay down the debt but accumulate more.
Our friend Dylan Grice of Societe Generale writes:"
Voters don't go for long-term gain when it costs short-term
pain. They'll certainly consider the guy who frowns and earnestly tells them that if they don't put down the snacks, go to the
gym and work off some of the flab they've been piling on there
will be serious consequences one day, but they'll only vote for
him if he also tells them that they can go ahead and eat
cheeseburgers and fries in front of the TV a little bit longer.2
One of the reasons Dr. Zimbardo cites for the epidemic of dropouts
is the increased use of game devices. It seems the average teenager
has played about 10,000 hours of video games and TV (some of it not
so wholesome). It is an instant feedback, instant gratification society.
And when we send that kid to school, he is in an old-style lecture
(boring!) with no way to feed back into the system. No dopamine
rush from killing yet another zombie or enemy soldier. No thrill of
the hunt. "
"Yet voters all over the world act just like teenagers. We get frustrated when it takes more than a minute for our computers to boot up
(thanks, Bill Gates!) or when it takes too long to download a file. And
we want our economic and political fixes to be the same: quick and
easy. The problem is that the political and economic cycles are not the
same.It is difficult for politicians to respond to the longer-term
problem
when they face voters often"
"Perhaps more than anything else, failure to recognize the
precariousness and fickleness of confidence--especially in
cases in which large short-term debts need to be rolled over
continuously--isthekeyfactorthatgivesrisetothethis-time-isdifferent syndrome. Highly indebted governments, banks,
or corporations can seem to be merrily rolling along for
an extended period, when bang!--confidence collapses,
lenders disappear, anda crisishits. "
"The author of this report highlights that most of the obligations
countries now have is to their pensioners and senior citizens.
Naturally,
governments could cut Social Security or Medicare and reduce the
future liability. There is no way that would fly politically. The complication is that as countries grow older, most of the voters also
happen
to be senior citizens. As Figure 6.4 from the report shows, in the
United
States and Europe, older voters will be the majority of voters in 2020.
Politically, governments have very little time to make adjustments to
retirement and medical benefits."
"Europe or Britain or Japan!)
Amentorofmineoncetoldmethatthemarketwoulddowhatever
it could to cause the most pain to the most people. One way to do that
would be to allow deflation to develop over the next few quarters or
years, thereby probably affecting many investment classes, before
inflationandthenstagflation become(hopefully) theendofourperilous
journey. Which, of course, would be good for gold. If you can hold on
in the meantime.
Is it possible that we can find some Goldilocks end to this crisis?
That the Fed can find the right mix, and Congress wakes up and puts
some fiscal adults in control? All things are possible, but that is not the
way we would bet. "
x
Is Divorcing An Abusive Spouse Ever Too Expensive?
An old joke asks "why does a divorce cost you half your money?" with the answer
being "because it’s worth it". After all, there is little worse than being stuck in a
loveless, tense, or even downright hostile relationship. Which, of course, is what the
eurozone has become, without even the excuse of keeping the show on the road for
the kids’ benefit. In the eurozone’s loveless marriage, no-one dares to move out
because the potential costs of that action are so unclear. However, with the news that
French unemployment continues to scale record heights, that the Bank of Spain has
just downgraded Spain’s growth forecasts from -0.5% to -1.5% and that Spanish
unemployment will consequently rise for a sixth year in a row to a likely record high
of 27%, that European car sales continue to plummet, etc... the question remains open
as to how much abuse the various spouses are willing to take?
For now Cyprus clearly wins in the battered wife stakes: daily cash withdrawals from
banks are limited to €300, time-deposits (even those below €100,000) are frozen until
further notice, etc. And needless to say, like every abusive husband, the Troika offered
up the usual contradictory messages of "Cyprus was looking for its beating" and "it
will never happen again". And so the question now faced by Europe’s other, battered
wives (i.e., investors in "fiscally-challenged" countries and other European Monetary
Union bank depositors) is whether this abusive husband has seen the light? Or
whether the next time the pressure boils, the Troika’s punches will again fly, thereby
extinguishing any notion of European solidarity, any dream of banking union, and any
hopes that eurozone nations will stop sleeping in separate rooms and instead jump in
the same bed of a common fiscal union needed to live harmoniously under a common
monetary roof?
The "good news" is that Europe’s battered wives may not have to wait that long to
find out whether the Troika has turned a new leaf.
Indeed, recent declarations by the International Monetary Fund (IMF) that Slovenian
banks have some €7bn of bad assets to write off, along with the news two days ago
that NOVA KBM, Slovenia’s second largest bank, was downgraded by Moody’s from
B3 to Caa2, should, against the backdrop of Cyprus’ large bank deposit losses, make it
challenging for Slovenian banks to keep deposits. Now, we fully understand that
Slovenia is not Cyprus, and that Malta is not Slovenia (just like Portugal was not
Greece, and Italy was not Spain, and Spain was not Uganda...). But having said that,
Europeans are not that different from one another (after all, wasn’t this the premise on
which the European Union was built!) and bank depositors in Slovenia or Malta must
now be confronting a simple question: believe the Dutch finance minister that the
treatment of bank depositors in Cyprus is a new template to deal with bust banks? Or
trust the European Central Bank’s (ECB) recent declarations that Cyprus was a
"one-time deal"? Needless to say, the risk is that Slovenian, Maltese and others around
Europe conclude that, like most abusive husbands caught in the act, the Troika is
probably speaking from both sides of its mouth and can no longer be trusted.
If so, a possible jog on the banks in Slovenia (the most likely next victim) will place
the Troika in an odd predicament. For if Slovenia turns for help to deal with its
challenged banks so soon after Cypriot depositors were left reeling, surely the Troika
must apply the same tough love. Yet if Slovenia ends up getting softer treatment than
Cyprus, can Nicosia really stick with a marriage where it is so obviously despised and
mistreated? And how could Russia not take its dress-down as an extremely hostile
act? On the other hand, if Slovenia also gets the full Diesel-bum treatment, the
markets’ faith in the ECB’s ability to keep the show on the road will be properly
shattered and a pan-European bank run might ensue. Hence, in Slovenia, the EU may
soon face a Pyrrhic choice....
*** EVERGREEN GAVEKAL / FULL COMMENTARY (EMAIL)
x
"Finally, many herd species, including again most deer and antelope,
do not have a well-defined dominance hierarchy and are not
instinctively pre- pared to become imprinted on a dominant leader
(hence to become misim printed on humans). As a result, though
many deer and antelope species have been tamed (think of all those
true Bambi stories), one never sees such tame deer and antelope
driven in herds like sheep. That problem also derailed domestication of
North American bighorn sheep, which belong to the same genus as
Asiatic mouflon sheep, ancestor of our domestic sheep. Bighorn sheep
are suitable to us and similar to mouflons in most respects except a
crucial one: they lack the mouflon's stereotypical behavior whereby
some individuals behave submissively toward other individuals whose
dominance they acknowledge"
(Guns, Germs and Steel)
x
Mish, France, the Hidden Zombie in Europe): Via Google Translate from
Spanish, GurusBlog asks and answers the question Is France the zombie hidden
in Europe?
Although still quite outside the focus of the media and investors as its
risk premium relative to German bonds remains relatively low, for
me, leaving aside the PIIGS, which are marked by blood and fire,
France is the real zombie in Europe, an economy that has been
losing competitiveness rather quickly. Here are some data ...
In 1999 France sold 7% of world exports. Today it only sells 3%, and
the figure continues to deteriorate.
In 2005 the trade balance was positive in France at +0.5% of GDP;
today it is a negative 2.7% of GDP; i.e., imports far exceed exports.
The French economy is becoming less competitive; for example, cars
and machinery equipment sales to China are seven times lower than
the annual sales volume of these products from Germany.
High labor costs, which combine high wages, little flexibility to fire,
and high taxes: French workers [do the fewest] hours of work in the
developed world, and 86% of the contracts are fixed. 42 of every 100
euros of wage costs of a company are social charges or taxes. In
Germany it's 34 out of 100 €, in the UK 26 out of 100.
Since 2005, unit labor costs in France have not only increased, the
cost to produce a car ... has increased 17%, while in Germany [the
cost has increased] 10%, in Spain 5.8%, and 2% in Ireland. In France
a worker earns on average €35.3 per hour, while in Italy the
average is €25.8 and €22 in the UK and Spain.
The most immediate results: The [profits] of French companies have
fallen to 6.5% of GDP, a level that puts them at 60% of the European
average. The reason is simple: French exports lost market share,
and the only way for companies to survive is to lower margins. But
lower margins mean less money to invest in new plants or
technology. So the R&D of French companies has fallen 50% in the
last four years....
That is a very well presented set of statistics by Guru Huky, founder of
GurusBlog. Indeed, French President Francois Hollande has made matters so
much worse for France, as I have commented many times.
The remaining question at this point is how much longer France will remain a
"hidden" zombie. It will be interesting to see the results (and the panic) once the
bond market turns on France.
February brought no improvement in the data:
(Feb 6th, 2013: Markit): French service providers signalled a further reduction
in business activity during January. Moreover, the rate of contraction
accelerated to the fastest since March 2009.
Incoming new business fell at a slower pace, but there were accelerated declines
in both backlogs and employment. Input prices rose further, but output charges
decreased at a sharper rate.
The seasonally adjusted final Markit France Services Business Activity Index
slipped to 43.6 in January from 45.2 in December. The latest reading was
indicative of a marked rate of contraction that was the sharpest for almost four
years.
A couple of weeks later, it was time for the Markit Flash PMI; and once again,
things looked remarkably less than OK:
(Feb 21: Markit): Latest Flash PMI data indicated that the downturn in French
private sector output deepened in February. January’s Markit Flash France
Composite Output Index, based on around 85% of normal monthly survey
replies, slipped from 42.7 in January to 42.3, its lowest reading since March
2009.
The steeper fall in overall output was driven by an accelerated decline in the
service sector where activity contracted at the fastest pace in four years.
Manufacturers signalled a slightly slower decrease in production compared
with one month previously, albeit still sharper than signalled in the service
sector.
New business placed with private sector companies in France fell again in
February, extending the current sequence of contraction to one year. The rate of
decline quickened slightly since January and was only marginally slower than
December’s 45-month record.
Service providers indicated that new business fell at the sharpest rate for just
under four years. Survey respondent s commented that difficult business
conditions and intensifying competitive pressures had conspired to depress
inflows of new work.
How about French unemployment? Well ... how can I put this delicately?
(February 26th, 2013: France24): Unemployment numbers in France rose by
43,000 in January to 3.16 million, an increase of 10.7 percent from last year, the
labour ministry revealed on Tuesday. The figure is at its highest since January
1997, when it reached 3.19 million.
The number of registered French unemployed rose by 43,000 in January to 3.16
million, the labour ministry said Tuesday, to just shy of a 16-year record.
The ministry said the number of registered unemployed rose by 10.7 percent
from last year.
Unemployment in the eurozone's second largest economy hit its modern day
record of 3.19 million reached in January 1997.
Rising unemployment is a setback for Socialist President Francois Hollande,
who has pledged to curb the unemployment rate from the current level of more
than 10 percent to a single-digit figure by December.
Housing starts?
(March 6, 2013: Mish): Housing starts in France will fall to 280,000-300,000
in 2013, the lowest level in 50 years, warns developer Nexity. The government
wants 500,000 units per year.
French president Francois Hollande thinks he knows the proper amount of
houses that need to be built. Therefore, Hollande confirmed measures to support
building quickly.
Here is a Mish-modified translation from Les Echos...
Emergency. This is the word that comes to everyone's lips about
building. Housing is at its lowest level since fifty years. François
Hollande confirmed in an interview yesterday that "support for
building" will be amplified quickly for the "public good".
The Ministry of Housing was happy about yesterday's statements
from the Head of State: "This means we are moving towards an
ambitious plan". We recall the campaign promise to build 500,000
homes per year, of which 150,000 will be in social housing to offset
the increase in the VAT rate.
The net result of all this atrocious news? Why, a suspension of efforts to reduce
France's budget deficit and the suspension of 'l'austérité' (which, with French
government spending being 56% of GDP, was about as real as the UK's
'Fauxsterity' program anyway):
(March 10, 2013): El Economista): The French Minister of Budget, Jérôme
Cahuzac, acknowledged that new taxes or spending cuts have a recessionary
effect in the short term and "Given the weakness of the current situation, further
efforts are ruled ask the French in 2013," said Cahuzac in an interview published
by Le Journal du Dimanche.
The 3% target was initially set for 2013, but the French government officially
decided to postpone further action on account of the poor economic outlook.
Hollande stressed his project to achieve "zero deficit" by the end of his term in
2017, is still in place and that France's actions are "not to please the European
Commission or the rating agencies, but to regain our sovereignty, alienated by
markets in recent years."
... and of course:
March 13, 2013: Der Spiegel): Never before has a French president fallen in
public sentiment as quickly as François Hollande. Only 10 months after entering
into office, his popularity rating is plummeting ...
Since taking office 10 months ago, Hollande has experienced the fastest drop in
popularity ever seen in French presidential politics. In June of last year, those
who said they had confidence in him numbered between 51 and 63 percent,
depending on the polling institute. That number is now 30 to 37 percent, nearing
the lowest approval rating of any French president on record: Nicolas Sarkozy
in May 2011, at 20 percent.
Political expediency.
They all have to get reelected somehow; and, as Mr.
"When-it-gets-serious-you-have-to-lie" himself, Jean-Claude Juncker, has so
succinctly pointed out,
We all know what to do, we just don’t know how to get re-elected after we’ve
done it.
Anybody not in line at a Spanish or Greek bank on Monday morning, looking to
withdraw their funds, deserves the eventual haircut they are likely to receive. But,
lo and behold:
(Reuters): The Bank of Spain said on Saturday there were no signs of capital
flight from Spain as a result of developments in Cyprus, where euro zone
ministers are demanding that depositors forfeit some of their savings to avert
bankruptcy.
"As far as I am concerned, the Spanish banking system is running under
absolutely normal conditions," a spokesman for the bank said.
Official Spanish sources were quick to argue that the approach taken with
Cyprus would be unique.
"Cyprus's situation and this agreement cannot be extrapolated to any other
country in the euro zone," a Spanish economy ministry source said on Saturday.
But I had best leave you for another week, as I have just realized how worked up I
got here. If you made it this far, I apologize for taking up so much of your time!
Many pages ago, when I first proposed Williams's Theory of Disconnectivity, you
may remember, I defined the formula thusly:
OS+ps2≠R
Let's finish by applying some real-world values to our variables, with Cyprus as
the example:
OS: €5.8bn will be stolen (yes, stolen) from savers in Cypriot banks.
+
ps2: (WSJ, March 1, 2013): Cyprus' newly appointed Finance Minister Michalis
Sarris Friday rejected talk of depositors taking losses as part of the country's
bailout as he took control of the country's purse strings following Sunday's
presidential elections.
"There is nothing more foolish than talking about a deposits haircut," Mr. Sarris
told journalists
(Bloomberg): When asked if a deposit assessment could be ruled out for future
rescues, [Olli] Rehn said in an interview: “It can and there is no concrete case
where it should be considered.”
≠
R: This will not be the last time depositors are screwed, and it will lead to
additional capital flight elsewhere in the EU. The Europeans have not only not
solved their problems, they are well along in the process of painting themselves
into a corner where 'whatever it takes' and 'everything we are capable of' are at
last proven to be two completely different things.
x
“On human decay and what can be done about it
Out behind the University of Tennessee Medical Center is a lovely,
forested grove with squirrels leaping in the branches of hickory trees and
birds calling and patches of green grass where people lie on their backs in
the sun, or sometimes the shade, depending on where the researchers put
them.
This pleasant Knoxville hillside is a field research facility, the only one in
the world dedicated to the study of human decay. The people lying in the
sun are dead. They are donated cadavers, helping, in their mute, fragrant
way, to advance the science of criminal forensics. For the more you know”
Excerpt From: alf. “Microsoft Word - Roach, Mary - Stiff, The Curious Lives of
Human Ca.” iBooks.
This material may be protected by copyright.
“on a series of decomposing bodies in the charnel ground, starting with a
body "swollen and blue and festering," progressing to one "being eaten by…different
kinds of worms," and moving on to a skeleton, "without
flesh and blood, held together by the tendons." The monks were told to
keep meditating until they were calm and a smile appeared on their
faces. I describe this to Arpad and Ron, explaining that the idea is to
come to peace with the transient nature of our bodily existence, to
overcome the revulsion and fear. Or something.
We all stare at the man. Arpad swats at flies.
"So," says Ron. "Lunch?"
Outside the gate, we spend a long time scraping the bottoms of our boots”
“On human decay and what can be done about it
Out behind the University of Tennessee Medical Center (body farm) is a lovely,
forested grove with squirrels leaping in the branches of hickory trees and
birds calling and patches of green grass where people lie on their backs in
the sun, or sometimes the shade, depending on where the researchers put
them.
……..
This pleasant Knoxville hillside is a field research facility, the only one in
the world dedicated to the study of human decay. The people lying in the
sun are dead. They are donated cadavers, helping, in their mute, fragrant
way, to advance the science of criminal forensics. For the more you know”
“on a series of decomposing bodies in the charnel ground, starting with a
body "swollen and blue and festering," progressing to one "being eaten by…different
kinds of worms," and moving on to a skeleton, "without
flesh and blood, held together by the tendons." The monks were told to
keep meditating until they were calm and a smile appeared on their
faces. I describe this to Arpad and Ron, explaining that the idea is to
come to peace with the transient nature of our bodily existence, to
overcome the revulsion and fear. Or something.
We all stare at the man. Arpad swats at flies.
"So," says Ron. "Lunch?"
Outside the gate, we spend a long time scraping the bottoms of our boots”
x
"The prevailing wisdom is that markets are always right. I take the opposite position.
"I assume that markets are always wrong. Even if my assumption is occasionally
wrong, I use it as a working hypothesis.
"It does not follow that one should always go against the prevailing trend. On the
contrary, most of the time the trend prevails; only occasionally are the errors
corrected. It is only on those occasions one should go against the trend.
"This line of reasoning leads me to look for the flaw in every investment thesis. My
sense of insecurity is satisfied when I know what the flaw is. It doesn't make me
discard the thesis. Rather, I can play it with greater confidence because I know what is
wrong with it while the market does not.
"I am ahead of the curve. I watch out for telltale signs that..."
股市
Stock
home
房地產
Property
The American home mortgage market has, for all practical purposes, become
nationalized since the 2008 financial meltdown, according to an analysis by
ProPublica, the non-profit investigative journalism project.
The takeover, without which the housing market could barely function, has occurred
against a backdrop of little planning or public discussion.
In fact, nine out of every 10 new mortgages are now backed by the U.S. taxpayer, up
from three in 10 in 2006.
x
Myanmar is the second-largest country by area in ASEAN, the fifth largest by
population and one of the richest in terms of the natural resources it possesses. It is also
the poorest.
According to IMF estimates, Myanmar’s GDP per capita in 2011 is estimated to have
been $804. To put that into perspective, it is roughly one sixth that of Thailand and less
than one sixtieth of the country I call home, Singapore (chart, be- low, left).
Over 75% of the world’s teak is produced in Myanmar, along with over 90% of the
worlds jade and 90% of the world’s rubies. It has the world’s 4th-largest proven
reserves of natu- ral gas with 11.4 trillion cubic feet and has the 65th largest oil reserves
on the planet (Myanmar has been exporting oil since 1853). Amazingly enough, only
half of the country’s land area has been geographically surveyed so further riches
undoubtedly lie beneath Myanmar’s fertile soil.
1. The agricultural sector in Myanmar employs over 60% of the workforce and,
along with being the world’s 7th-largest rice producer, Myanmar farms over 50
different crops as well as being home to a burgeoning aquaculture industry.
2. Over the past 10 years, Myanmar’s GDP has grown at an astonishing 9.7%
CAGR (chart, above), outpacing every one of its ASEAN neighbours and, in fact,
if official statistics are to be believed, despite heavy sanctions, during the period
1998-2007, its economy grew at 12.7%— faster than both India and China.
3. If official statistics are to be believed.
4. Myanmar’s GDP was US$20bln in 1989 but, after the abandonment of
socialism and a series of economic reforms in the wake of the 8888 Uprising, it
was re-based to US$3bln in 1990. It took almost twenty years for the former level
to be reached but, between 2007 and 2011, GDP soared 150% to stand at
US$50bln in 2011 according to the IMF.
5. It is mouth-watering to imagine the possibilities in Myanmar should it be truly
freed from the political shackles under which it has been operating for most of its
existence and, through a simple comparison with its closest neighbour and main
trading partner, Thailand, those possibilities become only too clear all-too
quickly as a recent report from UBS highlighted:
6. • The average life expectancy in Thailand is 10 years longer than Myanmar and
infant mortality rates are five times lower.
7. • Electricity consumption and car ownership per capita in Thailand is 20 times
that of Myanmar.
8. • In Thailand, mobile phone penetration exceeds 115%. In Myanmar today it is
just 1%.
9. • Tourist arrivals to Thailand are 40 times that to Myanmar. Given the range of
attractions in Myanmar (including 100 sq km of temples in Bagan and several
hundred islands in the Andaman Sea), the growth potential is significant.
10. • Tourist arrivals to Myanmar for the whole of 2011 were only equivalent to
arrivals to Thailand for a single week.
11. • Myanmar has three international airports but 93% of arrivals still land in
Yangon (Rangoon).
12. • There are more hotel rooms in Bangkok than in the whole of Myanmar
13. • In 2009, Myanmar exports totalled US$9bln as opposed to Thailand’s
US$225bln
14. But that’s not all. Want some more? How about we look at Myanmar’s property
market where there has been minimal development of any kind over the past 10
years?
15. • Currently, just one office building on Sathorn Road, Bangkok contains more
space than for the whole of Yangon.
16. • The retail space in Central World in Bangkok exceeds the total retail space for
all of Yangon.
17. • Yangon only has 740 serviced apartments, compared to 15,000 in Bangkok.
18.
19. Or the automotive market?:
20. Myanmar does not manufacture vehicles domestically. Rather, they are
imported under permit. The relatively few permits awarded each year means that
the number of registered vehicles in Myanmar is very low; approximately
300,000 compared to 5,400,000 in Thailand.
21. As you can probably imagine, Foreign Direct Investment in Myanmar has
soared (chart, below) after the new President, Thein Sein declared after taking
office that, in Myanmar, it was “...no longer business as usual”.
22. Sein pledged to root out corruption, boost trade and attract foreign
investment—but the story surrounding that is something for next time
x
The price of agricultural land is another that is just wrong.
It's a familiar old saw that the world is not making any new farmland (with the exception,
perhaps, of urban, vertical farming ventures, which hardly make up for the wider erosion of
productive farmland to urban development), and a presentation I saw recently by a potash
manufacturer here in Singapore made that abundantly clear with the simple inclusion of
three pictures.
The pictures in question (below) are aerial shots of Indonesia's capital, Jakarta, taken in 1975,
1990, and 2010, and as a sequence, they show just how devastating the spread of urban
centres has been for productive arable land as Jakarta spreads out, consuming everything in
its path.
In 1985, agriculture as a share of Indonesian GDP stood at 23.2%, but by 2000, that share
had fallen to just 16.9%. By 2010, according to the OECD, it had fallen further, to 14%. Whilst
this is normal in developing economies, in the wider context it is a problem that the world
will one day be forced to reckon with.
The world supply of arable land has been basically capped at around 3.4 billion acres for a
decade whilst the population has increased by about 600,000,000 people.
The great Jeremy Grantham of GMO has written extensively about this problem, and his
most recent look at the potential problems facing the world, "Welcome to Dystopia",
summarized things beautifully:
The general assumption is that we need to increase food production by 60% to 100% by
2050 to feed at least a modest sufficiency of calories to all 9 billion+ people plus to deliver
much more meat to the rapidly increasing middle classes of the developing world...
In nominal terms, those who claim farmland's rise is over look like they have a valid point,
but, when the same land is measured in real terms—gold oz—a very different picture
emerges.
home
Energy
Uranium is in a stealth bull market, where the commodity price is not
attracting the mainstream media's attention to the sector, but the
smart money is buying the right uranium explorers and producers to
position themselves before the spot price catches up with the
long-term price of uranium, which is a matter of "when" rather than a
question of "if."
x
http://www.eia.gov/analysis/studies/worldshalegas/
x
Australia’s emergence as a uranium superpower is largely due to BHP Billiton’s Olympic Dam project,
relative to its takeover price or enterprise value, UEC is the cheapest of
all the mid-tier energy-pro- ducing companies on the list based on an
energy- equivalent basis.
As of January 2013, the 2018 U3O8 forward curve has been traded at
US$68 per pound. That is over a 50% premium from where the spot
price of uranium trades today. Utili- ties would not be buying uranium
at over a 50% premium if they didn’t think uranium is going higher and
will get more expensive.
Andrew Cates, an economist for UBS, based in Singapore, published a
penetrating study on the relationship between inflation and
demographics this week. He notes that countries with older
populations tend to have lower inflation. That is not what the textbooks
suggest, but it's what the data reveals:
x
Mainland China currently has 16 nuclear reactors, almost 20 under
construction, and is look- ing to ramp up generation to 400 GW by 2050.
To fuel 400 GW, China will need 195.4 million pounds of urani- um per
year for its power plants.
Considering that the largest uranium produc- er only has an output of 19.58
million pounds per year, and that the com- bined global output is only 120
million pounds, explorers and develop- ers truly have their work cut out for
them.
America’s substantial growth from 1900-1950 required an increase in elec- tricity generation of
more than 60 times.
195.4 million pounds of
uranium is roughly equivalent to 4.9 million barrels of oil equivalent per day
(boepd)... that’s 900,000 boepd more than what the largest oil company in the
world, the newly consolidated Rosneft, produces. The runner-up, Exxon Mobil,
comes in at a distant second at 2.1 million boepd.
x
Rule: “Uranium. The price has to go up because the industry is losing money at
current prices. And it can go up because the utility of uranium to users, i.e. power
consumers, is so high. If something has to go up and it can go up, my suspicion is
that it will go up.
Again, it might not happen by the end of summer, but over the two and three year
time frame I very much see the spot and term market converging above $70, which
from a $40 base is pretty attractive.”
Eric King: “Why so bullish uranium? That’s more than a 70% move you expect in
the price of uranium.”
Rule: “It got oversold. The price of uranium was doing fine at $80, which was a
market clearing price. It was a price at which there was a lot of material available to
users, and where suppliers were making a reasonable return....
x
In 1960, the United States had over 1,000 mines producing almost 36
million pounds of uranium. Today, according to US Energy Information
Administration, the US has only 11 mines producing less than 3.4 million pounds of uranium.
x
However, what they don't realize is that there is
already a bargain available – in uranium.
Despite being the source of 20% of electricity in
the United States and 35% in the EU, its price
remains at multiyear lows.
Yes, gold has dropped a lot in the past month,
but an ounce of gold can still buy almost 35
pounds of uranium at today's prices – that's
much more than the historical average of 22
pounds. In fact, back in 2007, an ounce of gold
would only net you about five pounds of
uranium.
x
The International Energy Agency forecasts that global demand for electricity will
grow by a staggering 70% between 2012 and 2035. The increase will come
predominantly from developing countries – over half is expected from China and
India alone.
Serious pollution problems mean that those developing countries cannot produce all
that electricity by burning coal. Amir Adnani, Uranium Energy Corporation's CEO,
says, "The plans to develop nuclear power in China and other countries are very much
driven by a set of realities that is very different and very acute. People are dying every
year in China, literally choking to death, because of all the toxins that are being put
into the environment by burning coal."
This explains why China, India, and the Russian Federation are quietly forging ahead
with nuclear energy expansion while the West and Japan fret over it. As you can see in
the table below, those developing countries are dominant leaders in the construction
of nuclear facilities.
Country
Nuclear Plants in Operation
Nuclear Plants Under Construction
Argentina
2
1
Armenia
1
0
Belgium
7
0
Brazil
2
1
Bulgaria
2
0
Canada
19
0
China, Mainland
17
29
China, Taiwan
6
2
Czech Republic
6
0
Finland
4
1
France
58
1
Germany
9
0
Hungary
4
0
India
20
7
Iran
1
0
Japan
50
3
Korea
23
3
México
2
0
Netherlands
1
0
Pakistan
3
2
Romania
2
0
Russian Federation
33
11
Slovakian Federation
4
2
Slovenia
1
0
South Africa
2
0
Spain
8
0
Sweden
10
0
Switzerland
5
0
Ukraine
15
2
UAE
0
1
United Kingdom
16
0
United States
104
1
Total
437
67
Source: European Nuclear Society
It typically takes about six years to complete a plant once it is under construction, so
the 67 facilities shown above should be producing electricity soon. In addition, over
100 reactors are at various stages of planning and permitting.
So it looks like the needs of developing countries will be more than enough to
revitalize and sustain the nuclear-power industry. As for the developed countries,
many still heavily rely on nuclear energy, and that won't change anytime soon. In fact,
the reliance may only increase in the coming years.
Though many developed countries have been cool at best and hostile at worst toward
nuclear energy expansion, a more conciliatory approach may be required in the future.
That's because many of the same people who are concerned about the risks and costs
of nuclear power are even more concerned about global warming. That means fossil
fuels and the carbon dioxide they emit must be limited.
There are a number of supply and demand circumstances that appear to be forming a
perfect storm for bullish uranium prices. From the demand side, the 67 new reactors
that we discussed earlier will be coming online in the near future.
On the supply side, there isn't enough uranium being mined to meet current reactor
requirements, let alone new facility requirements. According to the World Nuclear
Association, there was a 40-million-pound uranium production gap in 2011. It is
unlikely that that gap will be closed at current prices; miners claim that their
production costs average $85 per pound. With spot prices at about $40 per pound,
miners have no incentive to bring new capacity online.
Another factor affecting the supply side is the coming end of the Megatons to
Megawatts program. Under this arrangement, the US and Russia agreed to convert
high-enriched uranium from Russia's dismantled weapons arsenal into low-enriched
uranium for use in power plants. This secondary source provides about 15% of the
US's annual supply of uranium. However, the program will expire later this year and
when it does, the production gap will widen. Guess what will happen to uranium
prices. That's right: they'll skyrocket.
x
after Fukushima. So, the oil import bill last year was $100 billion/day and obviously
that’s gone up 30% in Yen terms. But, again, we had one of the cabinet members
come out yesterday and say that the government was going to mitigate the effects of
inflation for small to medium sized businesses—well, they can’t do it. I’m pretty sure
we’re going to see these nuclear reactors turned on as fast as they possibly can
because they need to bring some of these costs down for a country that has no energy
apart from nuclear.”
x
Actually, we've written that we believe that Fukushima is the beginning of the fourth
great bull market for uranium. With the Chinese, Russians, Koreans, and other
countries committing to nuclear energy as part of their energy matrix, even after
Fukushima the trend is very solid. By 2020, there's going to be another 88 reactors
online. And already today, the US imports over 90% of the uranium it consumes.
To put that into perspective, consider that in 1960, the US was the world's largest
uranium producer. At the time, there were over 1,000 uranium mines in the US,
producing over 36 million pounds of uranium every year. Today, there are eleven
uranium mines, producing 3.4 million pounds a year. So America is producing less
than 10% of what it produced in 1960, and yet is more dependent than ever on nuclear
energy.
One in every ten homes in America is powered by Russian uranium.
L: Wow… I can see why you're still bullish. What else do you like these days?
Marin: One of the most interesting and powerful market dynamics I see today is the
European addiction to Russian natural resources. That can't change quickly, and there
is a great potential for profit. The way we approach it in our letters is to ask ourselves
how we can profit from the Putinization of Europe. It's not just oil and gas, but
uranium as well, and non-energy resources. We've found several profitable niches.
x
At $43.65 a pound, uranium "is ridiculously low and set to rebound," says Byron
King.
Unfortunately, as you can see from the chart above, the deleterious effect of that
policy has been to send the oil price (in yen) soaring by 50% since June 2012; and
while that certainly helps Abe’s inflationary pledge, it doesn’t help Japanese industry
or the public trying to heat their homes through the harsh Japanese winter.
Sure enough, as December wound down, winds of change were blowing across the
land:
(BBC): The new government in Japan has announced it will review the planned
nuclear power phase-out proposed by the previous administration.
Turning to China, last month also saw work begin on the construction of a
state-of-the-art nuclear plant in Shandong Province, southeast of Beijing, after the
State Council gave the green light in October for nuclear construction projects to
resume. China’s plans to add 130-140 GW of installed capacity by 2030, along with
similar plans in Russia, India, South Korea, and the US (to name but four), will help
spur demand for uranium over coming quarters.
China, which is building 40% of the nuclear plants currently under construction
globally, is also key to the nuclear-energy future.
•Currently, China has 11 plants in operation or under construction, with a combined
capacity of 27 GW, all of which are set to be completed by 2016.
•China has a current nuclear capacity of around 9 GW, with 11 plants generating 2%
of the country’s electricity production. In 2009, former President Hu Jintao declared
that efforts should be made to develop nuclear power and renewable energies so as to
attain the target of 15% of primary energy supplied by non-fossil fuels by 2020.
•After the Fukushima accident, China announced that all nuclear plant approvals
would be frozen. This proscription has since been lifted, and the Chinese government
now has an official target of 40 GW by 2020, with plans to increase this to 200 GW
by 2030.
The uranium mining sector is extremely concentrated. The barriers to entry are
virtually impassable, not only in investment capital, but also in human capital,
technical and environmental risk, and investment horizon. That’s why only nine
companies in the world control 90% of global production.
Think about that. Nuclear energy fuels approximately 13% of the world electrical
grid, providing roughly 370 GWe of capacity. One hundred percent of the world’s
commercial reactors use uranium as fuel, and 90% of this fuel is controlled by nine
(9) companies.
x
There are few issues more certain to cause lively debate than nuclear energy. It’s
something that polarizes opinion like little else and, since the tragic events in
Fukushima, Japan last year, when an earthquake and tsunami caused catastrophic
damage to an ageing nuclear power station, the nuclear debate has raged anew, as
Germany and Italy have vowed to move away from nuclear power and towards a
greener future.
So that’s game over for the nuclear industry, right? Well, maybe not.
Nuclear power is still very much alive and kicking in China, India, and many
emerging nations that aren’t about to move away from clean, cheap power anytime
soon, as they scramble to find affordable ways to generate enough electricity to fuel
what feels like the only hope the world has for growth right now.
Throw in an impending supply shortage of yellowcake uranium as Australia’s BHP
decides to shutter the expansion of what would have become the world’s biggest
uranium mine, and you have a recipe for higher prices that may soon attract plenty of
investors to the beaten-down uranium mining sector.
Immediately after Fukushima, the share prices of most uranium producers were cut by
more than 60% by a market that feared for the future of the nuclear industry. Shortly
thereafter, as the sector began to stagger to its knees once again, Germany threw a
rabbit punch when it announced plans to phase out all 17 of its nuclear reactors by
2022.
Obviously, the news that one of the world’s industrial powerhouses would be shutting
its nuclear plants for good sent the uranium sector to the canvas once again – bleeding
profusely – and there, by and large, it has stayed.
According to the International Atomic Energy Agency (IAEA), there are currently 440
nuclear reactors operating across the world, with a further 65 in various stages of
completion, including 27 in China, 11 in Russia, and 5 in both India and South Korea.
These power stations, both existing and new, will require uranium in order to provide
the roughly 400 GW of electricity demanded by a world that is becoming ever more
dependent upon the provision of energy to power its continued urbanization.
Dr. Michael Dittmar, a physicist at ETH, Zurich, and working at CERN in Geneva,
recently wrapped some clear-headed analysis around the nuclear industry, for those
willing to ignore the hyperbole that has swirled around uranium for the last 18
months:
Operating nuclear reactors require the equivalent of about 68,000 tons of natural
uranium ore every year. Yet, over the past 20 years, no more than 40–50,000 tons of
uranium ore have been extracted annually from mines around the globe. Even taking
into account accumulated stocks, demand for uranium could soon exceed supply,
especially if the number of plants doubles by 2030. If nuclear power is no more
sustainable than fossil fuels, what does that imply for our energy future?
A valid question indeed.
In search of an answer, Dittmar first proceeded to establish some cold, hard facts
about uranium – and they are compelling, to say the least:
About 97% [of the world’s extracted uranium ore] comes from just 10 countries and
85% from 26 mines. The three largest uranium-producing countries are Kazakhstan,
Canada and Australia, in descending order. Together, they produced about 63% of the
total in 2009. The next three, Namibia, Russia and Niger, together produced 23% and
another 11% came from Uzbekistan, the USA, Ukraine and China.
The largest mine in Canada alone produces about 15% of the world total. The three
largest mines together extracted about 31% of all uranium in 2009 and the 10 largest
mines 59%. The next 16 mines together produced another 25%. Thus, global uranium
production is closer to a monopoly than any other energy source today.
About 30% of nuclear fuel currently comes not from mines but from an obviously
unsustainable source, civilian and military uranium stocks accumulated during the
Cold War and, to a much lesser extent, from fuel reprocessing.
perhaps enough uranium exists to operate the existing nuclear power plants for about
70 years...
The realistic chances of the world giving up on nuclear power anytime soon are close
to zero – we are just not ready to abandon a power source that, despite the
post-Fukushima hysteria, is infinitely cleaner and has killed far fewer people than, for
example, coal over the years.
... sooner or later, the Japanese nuclear disaster will be forgotten and the argument of
energy independence will resurface. Yet, just how independent are France and the
USA? Many countries import close to 100% of their uranium needs today; this is
especially true for the USA, France and the rest of the European Union. Thirty years
ago, the USA produced about 16,000 tons of uranium ore annually; today, that has
declined to less than 2,000 tons, whereas its power plants require about 20,000 tons.
Thus, less than 10% of their needs are satisfied by mines on their huge territory.
So both the USA and France (along with the rest of the EU) – some of the largest
users of nuclear-generated electrical power – are already dependent on foreign
largesse to supply them with the uranium they require to fuel their existing nuclear
power plants. Competition for this fuel is only going to intensify as more reactors
come online in the next decade. China’s increasing demand for a commodity that is
largely produced in extremely China-friendly jurisdictions such as Kazakhstan,
Australia, Namibia, and Russia may prove troublesome for the US and Europe, as
they come to rely more heavily on Canada’s good graces.
But there is one other aspect of the tightening supply dynamic that is particularly
curious when viewed from a US perspective; and that is America’s reliance upon, of
all places, Russia to supply the necessary uranium to keep the home fires burning.
Professor Dittmar explains:
It is especially interesting to note that 50% of US nuclear reactors are currently
running thanks to the goodwill of the Russian government, via a contract that expires
in 2013. Every year, the USA has to import about 10,000 tons of natural uranium
equivalent nuclear fuel from Russian military reserves. This dependence on uranium
imports has become much stronger in recent years because many US mines have been
depleted and the country’s civilian stocks of uranium have essentially been used up.
The US relying on a contract with Russia that expires in a little over a year to provide
them with 50% of their uranium needs, from decommissioned nuclear weapons? That
alone sounds like the foundation for a Tom Clancy novel; but throw into the mix
China’s increasing desire to secure uranium supplies, plus India’s growing power
sector and that of the UAE and, despite the horrors of Fukushima last year and the
subsequent knee-jerk reactions by Germany, Switzerland, and Italy in shuttering their
nuclear power plants, you have the recipe for much higher uranium prices going
forward.
Russia has stated categorically that once the so-called Highly Enriched Uranium
Purchase Agreement (HEU) expires at the end of next year, it will not be renewed;
and that will remove up to 25 million pounds from the marketplace each year
thereafter.
x
So certainly uranium is an undervalued commodity. Certainly North American natural
gas is an undervalued commodity. The base-metals prices are not under water – the
margins are good – but you can't finance a base-metals project right now because of
the seize-up in the banking climate. So my suspicion is that some of the higher-grade
porphyries that are controlled by juniors – the copper-moly porphyries – are probably
pretty cheap on a project basis. Buying these things, or buying companies that horde
them, and waiting for better times is a time-honored strategy. You've been in the
business long enough to remember the money that was made, as an example by Silver
Standard: $0.72 to $40.
Rick: Yes. You have to add all the separate companies. I mean, this was a lot of
money that was made. Paladin. Paladin was a hundred-bagger, warehousing uranium.
That's an opportunity.
Gold
貴金屬
Silver demand in India jumped an incredible 311% during the first
quarter of the current financial year: $1.78 billion, up from $433.8
million year on year. No less impressive is the country's year-to-date
silver imports: they've already topped 128.6 million ounces, more than
double the total imports of 61 million ounces in the whole of 2012.
The surge in interest in "poor man's gold" is partly attributed to the
tight restrictions imposed on gold. Demand for silver comes from both
fabrication (silver jewelry) and investment.
x
http://www.caseyresearch.com/cdd/chinese-housewives-vs.-goldman-sachs-no-contes
t
xxx
Meanwhile, platinum and palladium mining has seen severe labor
disruptions. A large number of platinum mines no longer meet their
cost of capital, and recent strikes in South Africa ended with workers
obtaining a raise of around 8% across the board1, which will only
exacerbate the problem posed by unprofitable mines. As mines close,
supply will shrink, which should push the prices of platinum and
palladium higher.
x
In the face of the ongoing financial crisis and monetary tightening in
every major conflict," the "Give Our Gold Back" website reads after we
ran it through Google Translate, "the country should keep the gold in
such a place [that] would be available at any time.
"It is important to guarantee," the site goes on, "that gold will not be
anyone 'leased' and its resources will always be precisely defined. This
is one of the foundations for a strong currency and economy."
Hey, all the cool countries are doing it. Venezuela's already done it.
Germany is likewise taking back its gold, although the New York Fed
prevailed upon the Bundesbank to drag out the process through 2020.
The movement began, according to its vice chairman Piotr Wojda,
when two economists became "worried about the safety of more than
100 tons of Polish gold held in the vaults of Bank of England for the last
70 years."
After meeting with members of the Polish parliament, Wojda explained,
"The members of parliament agreed that Polish gold reserves deserve
an independent audit..."
So far, the 21st century has been no golden age either. It is more like
an Age of Granite Countertops. It is an age where appearances count
for more than reality.
x
Big Gold Sep 2013
For the Silver Price To…
Match CPI-adjusted high of $50
Price
Gain
$148
530%
Match 1970s Return
Price
Gain
$160
581%
Match ShadowStats CPI-adjusted high
Price
Gain
$568
2317%
Based on $23.50 silver
Obviously, we don't want to assume silver will reach any of these prices. Personally, I
don't expect to see $500 silver. The point is to highlight the tremendous potential with this
metal that handily outperformed gold in the last great bull market—a feat I think it will
repeat. Today's risks to the fiscal, monetary, and financial systems are far greater than
they were in the late '70s. Silver hitting $100 thus seems highly likely at some point.
Quite curious. SLV is down 21.1% YTD, and was off as much as 39% on June 27.
Normally, you'd expect to see significant outflows of metal from the fund in such a
downdraft. But that didn't happen, in spite of the exodus in GLD.
And it's not just SLV.

Holdings of all silver ETFs reached 644 million ounces on August 21, a new
record high. This amount represents 83% of 2012 total mine supply.
And it's not just the funds.

US Mint sales of silver Eagles reached 4,406,500 ounces in July, a whopping
93.4% increase over July 2012 sales and a new monthly record. For the first
seven months of 2013, sales of American silver Eagles grew at the fastest pace
ever, hitting 29.4 million ounces. The Mint stated two weeks ago that if demand
continues at the current pace, "2013 will set a new record for sales."

The Royal Canadian Mint said last month that "year-to-date, we've had record
volume for silver Maple Leafs, the greatest we've had in the over 25 years that
we've produced them." This is interesting, the spokesperson added, because "the
Northern Hemisphere summer is traditionally a slow time for coin and metal sales,
but that's not the case this year… when prices drop in the market, investors see it
as a buying opportunity."

In India, silver imports grew an incredible 258.6% during April through July this
year, the highest for this four-month period in the last five years. In fact, July silver
imports were the second highest of any month in the last five years.
x
Uh-oh! You do NOT want to bet against a tide
like this — not in a commodity with a very
fixed existing supply and a very consistent,
but small, annual supply increase of around
2,500 tons.
Trust me. You just don't.
Five of the ten most populous nations on earth
are hungry buyers of gold, and each of them has
a burgeoning middle class that has, over the
years, embedded in its cultural psyche the idea
that owning gold is just what you do when you
can afford to.
(WSJ): Deep in China's spirit world, an
inflation crisis is brewing that would give
central bankers chills.
For hundreds of years, Chinese have burned
stacks of so-called "ghost money" for their
ancestors to help ensure their comfort in the
afterlife. The fake bills resemble a gaudier
version of Monopoly money, emblazoned with
the beatific-looking image of the Emperor of
the Underworld.
Traditionally, paper money burned in China
came in small denominations of fives or tens.
But more recent generations of money printers
have grown less restrained. The value of the
biggest bills has risen in the past few decades
from the millions and, more recently, the
billions.
The reason: Even Hong Kong's dead try to keep
up with the Joneses, and their living relatives
believe that they need more and more fake
bucks to pay for high-cost indulgences like
condos and iPads.
This year, on the narrow Hong Kong streets
that are filled with shops that specialize in
offerings for the dead, there appeared a
foot-long, rainbow-colored $1 trillion bill.
"What we have right now is hyperinflation,"
says University of Hong Kong economist
Timothy
Hau.
Zimbabwe."
"It's
like
operating
in
Source: Wall Street Journal
"Inflation is everywhere, so of course it
happens in the underworld too," says Li
Yin-kwan, 42. The $1 trillion bill is the most
popular note in her shop, she says, "because it
allows the ghosts to buy many things, such as a
fancy car and a big house."
Still, she said that there is also a place for
burning smaller-value bills. "The ghosts need
spare change to buy daily necessities, too," she
says, such as clothes and food. On a recent
Friday, all the trillion-dollar bills in her shop
and the shops next door were sold out. "I'm
sorry," Ms. Li said to one customer. "There are
still some $100 billion notes left."
OK ... you can read the entire article on page 23
here, and I'm belabouring the point now.
However, it is SO important to understand it
properly.
Here in the East, there is a desire to own gold
that utterly transcends anything commonly
understood in the West. It is hard-coded into
the DNA of several billion people, who, acting
together, will provide a strengthening bid for
gold for decades to come. Those people are
getting wealthier, and with their increased
wealth comes both an increased need to protect
it and an increased desire to hold it in a form
they have come to trust. And THAT, dear reader,
is gold.
In the late 1970s, Asia was a poor continent, and
though its appetite for gold was undiminished,
its ability to purchase it was restricted.
Source: IMF/TTMYGH
Through the 1980s and 1990s, central banks
were continuous sellers of gold (chart above),
which helped keep a lid on the price, but now ...
NOW, we have the makings of a perfect storm:

•The East has become far wealthier, and
that wealth is increasing steadily.
•The large pool of available (and eager)
buyers in the East is growing every day.
•Central banks — once the biggest sellers of
gold — have not only become buyers but
have begun to seek the return of their gold
held overseas in a quest to perfect their
assets.
•The central bank leasing scheme is
unraveling before our eyes.
•Available physical supplies of gold have
plummeted.
All these factors will undoubtedly conspire to
make the next six months (and beyond) a lot less
painful for holders of gold than the last six were
— a shift that has already begun to take shape
X
Between May 1st and August 20th, the rupee fell 20% against the US
dollar, and whilst that move may not have resonated with most
Westerners, it certainly did with India’s richest man:
(UK Guardian): India’s richest man is down to his last $17.5bn
(£11.2bn), after the plunging value of the rupee wiped out a quarter of
his fortune, in dollar terms.
(WSJ): Deep in China's spirit world, an inflation crisis is brewing that
would give central bankers chills.
X
Here in the East, there is a desire to own gold that utterly transcends
anything commonly understood in the West. It is hard-coded into the
DNA of several billion people, who, acting together, will provide a
strengthening bid for gold for decades to come. Those people are
getting wealthier, and with their increased wealth comes both an
increased need to protect it and an increased desire to hold it in a form
they have come to trust. And THAT, dear reader, is gold.
x
India's demand for gold during the second quarter of 2013 topped all
other countries'," writes U.S. Global Investors chief Frank Holmes -who's been poring over a new report from the World Gold Council.
That's despite the Indian government continually jacking up the
import duty on gold -- a desperate measure to try to arrest a
crashing rupee and soaring trade deficit.
The picture here is more telling. Since 1998, gold grades of the
world's top ten operations have fallen from 4.6 g/t gold in 1998 to
1.1 g/t gold in 2012.
The Indian government, still not satisfied with the effect of the
previous restrictions on gold imports, initiated yet another tax
increase, from 8% to 10%; it's the third increase this year. Import
duties were also increased for other precious metals: from 6% to
10% for silver and from 8% to 10% for platinum.
Officials have already admitted that government restrictions are
having a negative impact on the local gold market, creating
shortages, driving premiums higher, and stimulating gold
smuggling.
Another consequence of the Indian war on gold is a sharp surge in
silver imports, up 258.6% to 857 tonnes (27.5 Moz) from April to
July of 2013, compared to 239 tonnes (7.6 Moz) for the same
period in 2012. In fact, silver imports last month were the second
highest of any month in the last five years.
x
This does indeed look like Peak Gold, in terms of the easier-to-find,
higher-grade production having already peaked, but it's not as
concerning as you might think. As gold prices increased from $302
per ounce at the end of 1998 to the latest price of $1,377, both
low-grade areas of existing operations and new projects whose
grades were previously unprofitable became potential winners.
x
One I like to look at is the ratio between gold and the Dow Jones stock
market. For a long time, one of my long-term targets for selling my
gold has been when the Dow-gold ratio hits two to one. In other
words, when you can buy the Dow Jones index for two ounces of
gold.
Are we not facing the same situation today? Once again we have
witnessed a massive buildup in debt which will have to be liquidated,
akin to the situation in the 1930s. How do we get down to a sound
leverage ratio without facing massive deflation? Remember, credit
and debt is money; and if credit and debt contracts, it follows that
money also contracts, which of course is the very definition of a
deflation.
x
“The early signs are that we are going to see some sharp moves to the
upside here, and that certainly looks like it has begun. If you look
at what’s going on in the backdrop of this in the warehouses on the
COMEX, there are some very, very strange things happening.
If you look at the holdings of that ‘Big Three’ -- HSBC,
ScotiaMocatta, and J.P. Morgan -- currently HSBC has about 3.5
million ounces of gold in their warehouse, ScotiaMocatta has about
2 (million) and change ounces, and J.P. Morgan were down to
about 100,000 ounces, which is absolutely unprecedented.
So all of this gold is disappearing. It’s going out of the vaults. It’s
going out of the system, and it’s going into private hands. We
don’t know where it’s going. I’m sure some of it is going to central
banks (in the East), a lot of it is going to retail investors, and people
who are starting to get worried that there may come a day when
they ask for their gold back, and, like Germany, be told they can’t
have it.
So I’m very intrigued to see what happens in the next couple of
weeks and the next couple of months because we are going to see
some explosive moves to the upside.”
Eric King: “Let’s talk about inventories because you did bring that
up briefly and the fact that open interest, it’s hit 42.5 ounces of
paper claims for each ounce of physical gold (an all-time
record). It’s almost unimaginable what we are seeing right now.”
Williams: “Yes, it is. It’s certainly an all-time high, and it’s
something that will pose a very, very severe problem should certain
events come to pass. The main one is going to be people actually
standing for delivery and wanting to take possession of their
gold. And all of the evidence points to the fact that that’s what
people are going to start to do.
Gold has been pouring out of the registered warehouses on the
COMEX. It’s been pouring out of the (GLD) ETF. So if you do start
to see people looking at these inventories, looking at the overhang
in futures, and actually standing for delivery on their contracts,
there are going to be an awful lot of people chasing a very little
amount of gold.
We’ve seen, in the central bank space, ever since Germany, the
Bundesbank, asked for (a very small portion of) their gold back,
which is 300 tons of gold from New York. They were told it would
take 7 years (for that small 300-ton portion of their 1,436 tons of
gold supposedly stored at the Fed) as your listeners (and readers)
well know. That’s really inexplicable to me.
So, as soon as we saw that request for a sizable amount of gold (to
be returned to Germany) we’ve seen the price get hit
significantly. We’ve seen physical gold pouring out of places
looking like it’s going to fill a hole somewhere. And that causes an
enormous amount of potential trouble should a whole bunch of
other people decide, ‘You know what, just to be on the safe side,
we are going to take possession of our gold too.’
This whole fractional reserve gold scheme was always at some
point going to come under pressure. And it really feels to me like
the Bundesbank asking for their gold back was the starting pistol in
a race to protect an asset that really should never let out of your
possession. But that’s what the (foreign) central banks have done
by leaving the gold in vaults in New York and London, and now they
are going to be scrambling to get it back.
x
The silver imports in India are on pace to touch multi-year highs. The
imports during the initial six month period suggest a notable shift in
investor demand towards the metal. According to statistics, the
country’s silver imports during the first five months of the year have
surpassed the total imports during the entire year 2012.
The total silver imports by India during 2012 were 1,900 tonnes.
Meanwhile, the silver imports during the period from January to
May this year have already reached 2,400 tonnes. There has been
a significant rise in silver imports particularly during April to June.
The total silver imports during the period from January to March
were 760 tonnes. In the month of April alone imports surged to 720
tonnes. It further swelled to 920 tonnes in May
Japan's national debt exceeded 1,000 trillion yen for the first time,
underscoring the case for Prime Minister Shinzo Abe to proceed
with a sales-tax increase to shore up government finances.
x
Lower gold prices will eventually lead to reduced mine production. Why? Companies
need to preserve capital and so will delay or outright cancel projects. This is already
happening.
In most cases, expansion efforts will slow until metals prices trade at sustainably higher
levels. The shutdown of producing mines will also continue as lower metals prices
render them uneconomic. In addition, gold mining company write-downs in the second
quarter now exceed $25 billion, a signal that lower near-term production might be in
store.
But it's worse than that. During periods of depressed metals prices, producers will shift
from mining lower-grade ore to higher-grade areas... that is, if a company has
higher-grade material, which all of them don't. So the number of ounces produced
industry-wide falls.
Further compounding supply constraints, the pickup in production won't be quick when
metals prices do rebound. Delayed or scuttled projects take significant time to restart.
Even newer mines placed on care and maintenance don't return to productive assets
overnight; there's always a ramp-up period to full production, and management teams
won't commit funds until they're convinced higher prices are sustainable.
It's worse still, as recycling is also in decline. No one wants to sell their old jewelry
when prices are down—unless they think prices will go much lower. We don't think
this is the case, and the big drop in scrap sales appears to support our thinking. The
World Gold Council (WGC) says, "Supply from recycled materials may fall by as
much as 25% this year. Scrap bullion may decline by 300 to 400 tonnes in 2013, from
1,600 tonnes last year." Recycling is not a side show; it accounted for 37% of total
supply last year.
The net result is that the two largest sources of supply for gold—mine production and
recycling—are about to decline or already doing so. And this is happening as demand
for bullion remains strong and continues to grow. This supply
x
Sprott: “It’s not going to work. Backwardation is telling you that
people are unwilling to sell their gold at a price today where they can
buy it in the futures market at a lower price, and get the use of the
money for three months, and they are not prepared to do it. That’s
what backwardation tells you -- that there is a shortage of physical gold
today and that people aren’t willing to speculate that they are going to
get delivery in the future. So all of the signs point to extreme tightness
in the market.
You mentioned silver (earlier), which I think will outperform
gold. Even when I look at this month’s sales of coins by the U.S. Mint,
they have sold 100 times more silver coins than gold coins. Yet we
only produce 11 times more silver than gold, and most silver is not
available for investment, yet we see this huge investment demand for
silver.
According to data released by the Shanghai Gold Exchange, the
amount of gold contracts settled for physical delivery on its exchange
reached a staggering 1,098 metric tonnes year-to-date as of the end of
June.1 This is an astoundingly large amount of physical gold. For
perspective, 1,098 tonnes represents approximately 40% of the entire
estimated global gold mine production in 2013. It also represents
roughly 1/8th of the US Treasury’s official gold reserves, and over
100% of China’s stated official gold reserves. If the rate of physical
delivery on the Shanghai Gold Exchange continues at current levels, it
will deliver the equivalent of over 100% of global mine production by
the end of this year… all through one exchange.
In contrast, the COMEX futures exchange in New York, where the bulk
of US gold futures are traded, saw a measly 160.7 tonnes of physical
delivery requests over the same period (year-to-date to June).2
Although the paper volume on the COMEX dwarfs that of the Shanghai
Gold Exchange, the level of physical delivery requests is only 15% of
that seen in Shanghai.
If the Shanghai data is true, when combined with the gold imports
going into China via Hong Kong, we now have a situation where China
is buying the equivalent of all global gold mine production produced on
a monthly basis. How that can coincide with a gold price drop of
US$400 per ounce over Q2 is beyond our capability to explain, but it
does mean that China is now the undisputed hub for physical gold.
x
Physical gold delivered to buyers by China's largest bullion bourse in
the first half of this year," Bloomberg reports, "almost matched the
entire amount taken from its vaults in 2012, and was more than double
the country's annual production."
The Shanghai Gold Exchange delivered 1,098 metric tons of bullion
through June 30. The total for all of last year was 1,139.
China might well surpass India as the world's biggest bullion buyer this
year,
x
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/20
13/7/10_5_Incredible_Charts_Covering_Gold_To_The_Surprise_Inde
x.html
x
Today (9 July), something happened that has not happened since the
Lehman collapse: the 1 Month Gold Forward Offered (GOFO) rate
turned negative, from 0.015% to -0.065%, for the first time in nearly 5
years, or technically since just after the Lehman bankruptcy
precipitated AIG bailout in November 2011. And if one looks at the 3
Month GOFO, which also turned shockingly negative overnight from
0.05% to -0.03%, one has to go back all the way to the 1999
Washington Agreement on gold, to find the last time that particular
GOFO rate was negative.
Before we get into the implications of this rather historic inversion, let's
review the basics:
What is GOFO (Gold Forward Offered Rates)?
GOFO stands for Gold Forward Offered Rate. These are rates at which
contributors are prepared to lend gold on a swap against US dollars.
Quotes are made for 1-, 2-, 3-, 6- and 12-month periods.
Unpleasant similarities with Libor and most other fixed (literally and
metaphorically) rates aside, what is known is that under normal market
conditions, GOFO is always positive, or in other words gold serves as a
money-equivalent collateral for a pseudo-secured loan against paper
fiat (USD in this case) hence the low interest rate.
Sometimes, however, normality inverts and the rate goes negative and
as such serves as a useful indicator of gold market dislocations. Thus,
while disagreements exists, one can safely say that what GOFO is, is
simply a blended indicator of liquidity, counterparty or collateral
(physical availability) stress in the gold market. Since it is next to
impossible to isolate just which component is causing the indicated
disturbance, it is prudent to be on watch for all three.
OK, so that clears it up pretty well — we don’t even have to take the
tarps off of the ol’ Thinkolator to tell you that Ian Wyatt is buying and
teasing Sandstorm Gold (SAND in NY, SSL in Toronto)
Which I own as well, and have written about many times here — it’s
been teased by other newsletters, and I’ve bought and sold the stock
and the warrants a few times since the company was founded, but it is
still a substantial position for me and my favorite gold equity
investment.
Silver’s year-to-date performance has been the worst among all
commodities, falling 35% from January to June 30th this year. It’s been
a rough ride for those who have held on, but recent news should give
silver investors a reason for some renewed optimism.
The news relates to recent filings that have revealed a dramatic change
in the positioning in the silver futures market and ownership of the
iShares Silver Trust (SLV).
In the COMEX futures exchange, the “Commercials” category of
traders, made up of large banks, has traditionally held significantly
large “short” positions – which means that the banks are either
hedging an existing silver position or betting that silver will depreciate.
The recent COMEX disclosures have revealed a staggering drop in the
“Commercials” outstanding short positions, however – representing a
decrease from 259 million ounces in February 2013 to 20 million
ounces as of the last Commitment of Traders (“COT”) report released
June 25th.1 This represents a significant change in the positioning of
the silver futures market, and also suggests that previously ‘short’
participants have exited the “short silver” trade altogether. This drop
actually represents the cumulative purchase of approximately 240
million ounces of ‘long’ silver contracts to cover the previously
mentioned short positions, so despite silver’s price decline, the silver
futures market has actually seen an abundance of buying.
Unfortunately, the COT and Bank Participation Reports don’t name the
largest holders of futures contracts, but it has been alleged that one of
the largest commercial ‘short’ contract holders is JP Morgan. JP Morgan
has long been questioned by silver investors who suspect that the bank
may be manipulating the price of silver for its own benefit. This
speculation has also been fueled by the fact that JP Morgan acts as the
physical custodian for the largest silver ETF, the iShares Silver Trust
(SLV), which has just over $6 billion in underlying assets.
The culmination of these suspicions resulted in a nationwide investors’
lawsuit that was launched against the bank back in 2011. In that suit
the plaintiffs alleged that JPMorgan held “significantly more net short
COMEX silver positions than the next three largest traders on COMEX
combined.” The Plaintiffs also asserted that, based on their analysis of
CFTC Bank Participation Reports and a CFTC “Commitment of Traders”
Report, “from August 5, 2008 forward, JPMorgan held approximately
20-30% of the total short open interest in all COMEX contracts.”2 The
suit was recently dismissed this past March, however, when plaintiffs
could not prove that the bank “intended to cause artificial prices to
exist”.3
Interestingly, in addition to the drop in ‘Commercial’ short positions
(which may or may not involve JP Morgan), recent filings have also
revealed that JP Morgan has dramatically increased its ownership in the
SLV ETF, for which it acts as physical custodian. The bank has
purchased close to 5 million units of the ETF over Q1 2013,
representing an increase of 500% as reported in regulatory filings
submitted April 25, 2013.4
The most common interpretation of this shift is that the large bank
(presumably, but not directly confirmed as JP Morgan) has closed out
its silver short positions (at a nice profit, no doubt), and is now
positioning itself for a bullish silver reversal. This is certainly what the
bank appears to be doing in the futures market, although its
participation through “paper” products based on silver’s spot price,
rather than on the underlying metal itself, makes it difficult to know for
sure. JP Morgan’s role as SLV custodian may also be involved in the
recent changes, as the SLV has, surprisingly, not seen much in the way
of net outflows over the past six months, despite silver’s lackluster
performance over the same period. Contrast this to the GLD gold ETF
that has lost close to 23% of its underlying gold holdings since the
beginning of the year.
Also noteworthy is the fact that the latest COT report for gold, as
reported by Bloomberg, shows that the ‘Commercials’ have reduced
their net short gold position to 35,200 contracts. The ‘Commercials’
haven’t carried this low a net short position in Comex gold futures for
more than 10 years. Could it be that the banks most active in shorting
precious metals are preparing for gold and silver to start moving in the
opposite direction?
With silver ETFs holding strong and large commercial buyers
repositioning their books to the long-side, we could be witnessing a
reversal in investment demand and, in turn, a potential bottom in silver
prices. We will have to wait and see how the silver price responds to
these changes in positioning.
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As of last Friday, gold has now fallen as much 35.4% (based on London
PM fix prices) over 96 weeks. But if you're like us, you still recognize
that the core reasons for investing in gold haven't changed. People who
sold their gold recently made a shortsighted decision. Before too long
precious metals will rebound—and probably in a big way.
But when? Does history have any clues about how long we'll have to
wait for that rebound?
Once gold bottomed at $103.50 on August 25, 1976, the trend
reversed and the metal rose a whopping 721% to peak at $850 on
January 21, 1980.
Silver's climb was even more dramatic. From its 1976 low of $4.08, it
soared 1,101%. This is the 10-bagger grail of investing, where
investors had the chance to add a zero to their initial investments.
But remember: the process was multiyear and began after a dismal
two-year decline that was punctuated with sharp selloffs, similar to
gold's behavior since its 2011 high. While that's a stupendous return
within a short time frame, the biggest gains were seen in the final five
months. The patience of some investors would certainly have been
tested in those firstnn three years.
Investment channels remain somewhat limited in China-- this problem
has been lingering for a while," says Zhang Chen with the Industrial
and Commercial Bank of China. "With an underperforming stock
market, tightly controlled property sector and low interest rates,
Chinese households have scant options to invest their money for better
returns. The gold price slump gives common Chinese... a window to
use their increasing wealth and boost investment."
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So I continue to believe that silver is going to be the investment of this
decade. I see wonderful statistics out of India on silver. You can just
imagine that if they can’t buy gold bars and coins, maybe they will start
buying silver. Well, that would just be a monstrous amount of silver
that the Indians would need and there is no way that the world can
supply it.”
As we had suspected, it would appear that the Indian gold trade has
moved offshore to avoid the restrictions on imports and extra taxes
imposed. However, this is not the biggest change in the Indian precious
metals market – silver imports have exploded.
Silver has not been exposed to the same import restrictions that gold
has and recent silver import figures confirm that investors have flocked
to silver, likely as a substitute for their desire for gold. And why
shouldn’t they? With limited bank branches in the country, owning
precious metals is synonymous with savings and security. While it
seems that the larger investors have moved their gold purchases
offshore, we suspect that the majority of Indian investors have turned
to silver as a substitute for gold. The recent import numbers are
staggering.
While India imported 1,900 tonnes of silver in 2012, in the first five
months of 2013 alone, imports have touched 2,400 tonnes. According
to industry estimates, silver imports during the January-March quarter
stood at 760 tonnes. Imports shot up to 720 tonnes in April alone, and
in May they further swelled by 920 tonnes.2 Let’s put these numbers in
perspective, according to the Silver Institute, the world produced
24,478 tonnes of silver in 2012, implying that Indians have imported
almost 10% of world production so far this year. If they continue to
import at the same rate as they have in May, over the next 12 months
India could import close to half of world silver production which is a
truly staggering shift in demand for silver.
And of course the central banks have bought worthless debts directly
from the banks in Europe. The ECB over the last 11 years has grown
its balance sheet over 200%. The Fed’s balance sheet has grown
400%. The Chinese central bank has grown its balance sheet 660%,
and the Bank of England 800%. England’s balance sheet has gone
from $2 trillion to $9 trillion, and of course that debt can never be
repaid.
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Gold's tiny share of global financial assets. "The value of global assets
amounted to $223 trillion as of the end of 2012," Stoeferle writes. "The
share of investable gold currently amounts to $1.1 trillion, or only
0.5%."
Compare that minuscule percentage with 1981... when gold made up
26% of global assets. Or 1948, when it comprised 30% of the pie.
We'll get there again, Stoeferle suggests: "The notable characteristics
of gold (global currency with a long-term track record, no credit or
counterparty risk, highly liquid and globally traded, very little inflation
through mine production) are especially desirable in the current
environment."
If U.S. Geological Society can be trusted, Silver got just seven years
before it would become the first element in the periodic table to get
extinct.
And yet it doesn't create any buzz in silver markets (may be 'panic' is
waiting for the right time to appear, possibly in the last two years
before its extinction year 2020) as many experts reject such reports
even if it was raised by the USGS.
According to the USGS the total amount of silver mined in history is
about 46 billion ounces. This compares to about five billion ounces of
gold. This ‘mining ratio’ is 9 to 1.The current ‘trading ratio’ is 57 to
1.The ratio is clearly out of whack.
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Because silver breaks down cell walls and interferes with respiration
and reproduction, bacteria have great difficulty in developing immunity
to the metal, The Silver Institute noted.
“Today, the need to combat antibiotic-resistant superbugs and to
suppress hospital-acquired infections has increased the importance
and number of uses of silver-infused products,” the Institute observed.
“The ability to coat materials such as polyurethane, silicone and textile
fibers with either metallic silver or ionic silver compounds now provides
clinicians with efficient means of overcoming difficult wound care and
device-related infections, which have long proved costly and difficult to
manage in terms of hospital care,” said the Institute. Earlier this year,
an in-vitro laboratory study conducted by Smith & Nephew, a global
medical technology company based in London, found a silver-coated
antimicrobial dressing, ACTICOAT, could kill “superbug” organisms
that were the most difficult to treat.
More recently, Reno, Nevada-based NMI Health recently launched its
SilverCare Plus antimicrobial performance soft surface products at the
40th Annual Association of Professionals for Infection Control
conference in Florida this month. NMI Health exhibited performance
fabrics including scrub and lab coat material, patient gowns, linens,
blankets and cubicle curtains. Collectively, these products account for
over 90% of soft surfaces found in the patient environment.
NMI partnered with Noble Biomaterials to manufacture the SilverCare
Plus line.
Modern technology has also enabled manufacturers to use silver to
fight potential infection beyond hospital walls, the Silver Institute noted.
A number of water purification systems rely on silver to keep water
fresh. Samsung is using nanosilver technology in some of its home
washing machines.
Motorola uses silver embedded in plastic housings for many of its
mobile phones. Other manufacturers are using silver in keys, or in the
cases of calculators and other hand-held instruments.
Paints too have been made more effective against molds, yeasts and
various bacteria with the addition of silver.
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Altogether, the IMF says of those that have reported thus far, central
banks bought almost a million ounces of gold last month.
Despite the drop in price, demand from the central banks of emerging
countries isn't slowing. You don't have to be Nostradamus to see the
writing on the wall with debt and currency dilution. As Grant Williams
points out in this video (gold comments begin at the 33:30 mark), if
emerging-market countries raised their gold Reserves from the current
average of 2.6% to 15%, it would require 17,359 tonnes of gold (558.1
million ounces). This is roughly seven years of global production –
which is almost certainly a low estimate given the fact that China and
Russia don't export metal.
When the gold price fell off a cliff in April, volume on the Shanghai Gold
Exchange quadrupled.
Clearly many investors around the world saw gold's unexpected decline
as a sale. This is not the behavior associated with a trend that is over –
just the opposite, in fact.
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The silver half dollars from 1964 and earlier, including the 1964 JFK half dollar, the
1948-1963 Benjamin Franklin half dollar or, if you’re really lucky, the Walking
Liberty half dollar that was minted from 1916-1947 are all 90% silver:
40% silver 1965-1970 JFK half dollars, Coinflation.com
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China's demand for gold jumped 20% to 294 tonnes in the first quarter of 2013, while
global gold demand overall slid 13% thanks to the dramatic rotation of demand from
paper to physical. Chinese demand in gold bars and coins grew to 109.5 tonnes - more
than double the five-year quarterly average of 43.8 tonnes. Central banks added 109.2
tonnes of gold to their reserves in Q1 2013, the ninth consecutive quarter of net
purchases. But it was the Q1 ETF outflows of 176.9 tonnes, equating to a 7% decline
in total gold ETF holdings that obscured the strong rise in investment for gold bars
and coins at the retail level. In the face of the huge 'paper' gold ETF outflows,
'physical' gold demand surged to its highest in 18 months...
central banks are building their supplies of gold as a means to diversify their holdings
away from the US Dollar and the Euro. As a percent of total reserves, many of these
emerging countries mentioned above own very little gold. In fact, Pierre Lassonde,
chairman of Franco-Nevada, has noted that even if emerging market central banks
wanted to increase their gold reserves to 15 percent of total reserves, they'd have to
buy 1,000 tons every year for the next 17 years!
wouldn't surprise us if Soros was buying physical with both hands at $1,321 on April
15... but we'll likely never know.
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The simple reality is that gold is a small market – the total global value of "investable
gold" (gold that isn't, for instance, bound up in crown jewels) is estimated to be about
$2.4 trillion.
By contrast, the global bond market is estimated at about $90 trillion and the global
stock market about $55 trillion.
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About 80 million ounces are mined annually these days, but there are about six billion
ounces estimated to remain above ground. So supply only increases about 1.3% per
year – it's fairly trivial, especially after industrial consumption. What determines the
price is the desire of current owners to buy, hold, or sell it. It's not like wheat, or even
copper, where new supply is critical.
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Why would investors wish to sell their gold holdings? As an alternative store of value,
it is easiest to think of demand for gold in terms of demand and supply of fiat money.
When demand for fiat money falls or supply rises, people decide to hold less and
move their cash into alternative stores (gold, silver and now Bitcoins being the most
common). Likewise, when people are optimistic about the state of the economy, they
demand more cash because they believe they will be able to invest it in dynamic
assets like stocks which will generate better returns.
“A surge in demand for money over gold (and hence a fall in the demand for/price of
gold) can, therefore, be very broadly justified by either a contraction in the supply of
money or a more general optimism about the economy. Are there grounds to believe
either of these has happened?”
Hmmmm... Good point. Based on those two functions, there doesn’t seem to be any
reason for investors to dump their gold holdings. Perhaps there is a more sinister hand
at work here. He concludes:
“The gold market remains one of the most complex and opaque in the world. None of
the publicly available data justifies the incredible price movements we have seen
recently. It looks as though the market has been rigged again.”
gold (aka crisis insurance) to
gold suffered its biggest two-day selloff in 33 years between Friday and yesterday.
You should love this if you're a long-term holder of gold, or a believer in gold as a
currency – you can buy your insurance cheaper," said Mark Fisher, CEO of MBF
Clearing Corp. "A long-term buying opportunity is near."
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A display case in the lobby of the Federal Reserve Bank here might express humility.
The case holds a 99.9 percent pure gold bar weighing 401.75 troy ounces. Minted in
1952, when the price of gold was $35 an ounce, the bar was worth about $14,000. In
1978, when this bank acquired the bar, the average price of gold was $193.40 an
ounce and the bar was worth about $78,000. Today, with gold selling for around
$1,600 an ounce, it is worth about $642,800. If the Federal Reserve’s primary mission
is to preserve the currency as a store of value, displaying the gold bar is an almost
droll declaration: “Mission unaccomplished.”
So while real rates have ticked up and are now a smidgen above zero, history tells us
that gold does well up until the real rate exceeds 2%.
As of last month, the Federal Reserve owns more than 40% of all Treasuries with a
maturity greater than five years. With the balance sheet of many major countries
equally bloated with paper money, this global unwinding process will be difficult to
time, messy to carry out, and punishing to our standard of living.
As John Hathaway, portfolio manager of the Tocqueville Gold Fund, recently stated:
What will happen to long term interest rates when the Fed is no longer buying the
lion's share of Treasury issuance? At stake is the economy, employment, and asset
valuation to mention a few possibilities for collateral damage. Even though Treasury
debt outstanding has tripled since 1998, the sum total of all interest paid by the
Federal government on that debt has barely budged. A return to competitive real
interest rates seems highly difficult given these facts
The trend is especially evident in emerging nations, where demand is rising three
times faster than in the developed world. However, this is hardly an anomaly, as silver
has been used as money for more than 3,000 years. In fact, the word "silver" translates
to "money" in many languages, including French, Spanish, and Hebrew.
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This relationship between central bank printing and gold has existed since the
beginning of the gold bull market in 2000. In fact, this relationship shows that for
every US$1 trillion increase in the collective central banks’ balance sheets, the price
of gold has generally appreciated by an average of US$210/oz.
Somewhat surprisingly, it turns out that the collective central bank balance sheets
have actually shrunk over the past three months – by approximately US$415 billion.
The biggest drop was seen in the ECB’s balance sheet, which shrunk by the
equivalent of US$370 billion, while other central banks also experienced small
declines. Based on our simple model above, a decrease of US$415 billion should
produce a gold price decline of roughly US$87/oz. And as it turns out, gold fell by
US$76/oz over the first quarter of 2013. Does this sound like a bubble to you? It
certainly doesn’t appear to be. Gold is performing almost exactly as it should – by
acting as a currency barometer for the amount of money being injected into or
withdrawn from the economy... which leads us to Japan.
I’d certainly buy Royal Gold before I bought a major gold miner, though
My favorite passive gold investment is Sandstorm Gold (SAND), in part because
they’re smaller and I think they have more growth potential, but that stock
now that rings a wee bit of a bell … and the Mighty, Mighty Thinkolator sez we’re
looking at a tease here for an old favorite, Altius Minerals (ALS in Toronto, ATUSF
on the pink sheets).
Silver prices (annual average shown) correlated with national debt at 0.67 and with
TMS at 0.58. The smoothed silver price correlation to national debt was 0.76 over 40
years and much higher over the past 13 years.
Silver prices (smoothed) correlated with crude prices (smoothed) at 0.93 – an
excellent correlation.
http://www.deviantinvestor.com/3471/3471/
Crude oil data found at InflationData.com. The 1971 price for a barrel of crude was
$3.60.
Silver data was found at Kitco. They list the average of approximately 260 daily
prices in each year. I used this annual average. Note that the spike high price in 1980
exceeded $50, but the annual average price was only $16.39.
National debt data found at TreasuryDirect.
True money supply (TMS) data was found at Ludwig von Mises Institute.
Gasoline prices from U.S. Department of Energy. The average retaSo … I don’t know
what else to tell you about Schlumberger … they’re the industry leader, I like their
“bolt on” strategy of acquiring companies with strong technology or software that
they can add to their services (including new imaging technologies, and their recent
acquisition of a subsea services company that they’re rolling into a joint venture with
Cameron), and they’re probably not a screaming bargain but the stock is reasonably
priced. Morningstar pegs them with a “fair value” of over $80 but doesn’t want to buy
until it’s down to the mid-$50s (it’s around $75 now), Trefis does a “sum of the parts”
analysis and gives them a value of $88. Analysts think they’re going to continue
growing at 15-20% a year, which is really pretty remarkable for a $100 billion
company, so if those targets are feasible it’s easy enough to buy it here in the
mid-$70s.
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Whom to Believe on Gold: Central Banks or Bloomberg?
by Jeff Clark, Senior Precious Metals Analyst Casey Research
April 5, 2013
Bloomberg reported recently that Russia is now the world's biggest gold buyer, its
central bank having added 570 tonnes (18.3 million troy ounces) over the past decade.
At $1,650/ounce, that's $30.1 billion worth of gold
Sources: IMF, CPM Group. Data as of 1-31-13.
Based on current data, the net increase in central bank gold buying for 2012 was 14.8
million troy ounces – and that's before the final 2012 figures are in for all countries.
This is a dramatic increase, one bigger than most investors probably realize. To put it
in perspective, on a net basis, central banks added more to their reserves last year than
since 1964. The net increase – so far – is 17% greater than what was added in 2011,
which was itself a year of record buying
The Chinese central bank holds an official 1,054 tonnes of gold in its reserves.
Bloomberg states, based on IMF data, that China has added somewhere around 425
tonnes over the past decade.
I can't say exactly what the correct number is, but the Bloomberg number almost has
to be wrong. Here's why:
Gold imports through Hong Kong in December alone hit a record high of 109.8
tonnes.
Imports for 2012 also hit a record high of 572.5 tonnes.
If you add 2012 mine production – remember that China is now the world's largest
gold producer – roughly 970 tonnes of gold was delivered to various entities within
the country last year.
Cumulative imports since 2001 have reached 1,352 tonnes.
Since 2001, imports plus production total a whopping 4,793 tonnes.
So Bloomberg is essentially saying that roughly 10% of the total gold available inside
the country during that period was added to China's reserves. While it's true that
Chinese citizens are buying a lot of gold (though perhaps more silver), it's highly
doubtful that private parties bought 90% of all the gold brought to the Chinese market
during this period. I think – but can't prove – that China's central bank is buying more
gold and at a faster pace than its Russian counterpart.
Jim Rickards, a highly respected author and hedge fund manager, said last month that
China has probably already accumulated between 2,000 and 3,000 tonnes of
additional gold reserves. If
The Bank of Japan has launched the most daring monetary experiment of modern
times, aiming to double the money base within two years to overpower deflation and
catapult the economy out of slump.
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This was also the observation of Roy Jastram, who wrote The Golden Constant in
1977. Jastram looked at 500 years of British history. He found that prices -- in terms
of gold -- were remarkably stable.
In response to that, the Pareto Principle suggests that 80% of the gains are found in
the final 20% of the bull market. As it currently stands, the Dow/gold ratio is sitting at
roughly 9-to-1. A move to a 5-to-1 ratio would require a $2,907-per-ounce gold price,
a 3-to-1 ratio $4,845 per ounce, and a 2-to-1 ratio would require a stunning
$7,268-per-ounce gold price.
A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course,a
1-to-1 ratio ($14,500 per ounce) would equate to an over 900% move left remaining
in the gold bull market.
Da Silva does not say so, but the Dow/gold ratio could come down in another way.
Gold does not have to go up in price; stocks could fall. If the Dow were to slip to
8,000, for example, this would be equivalent to a 5-to-1 ratio.
When the stock market cracked in 2000... and gold continued to rise... we thought the
two were headed for a historic conjunction. Perhaps at 2-to-1. Perhaps at 1-to-1.
Where would the two meet?
We guess it would happen at about 5,000. Gold would rise to $5,000 per ounce... and
the Dow would fall to 5,000.
Or at 2-to-1 -- the Dow could fall to only 10,000... while the gold price rose to $5,000
per ounce.
Who knows? But there is no reason to think that things have changed in any
fundamental way.
Gold is still real money. It is still brought forth only with much effort and investment.
And the Dow stocks still represent a certain group of publicly listed, US-domiciled
companies from which you can expect a certain earnings stream. There is no reason to
think that the basic relationship between the Dow stocks and gold has been altered in
any fundamental or everlasting way.
For practically the entire 19th century... many years of the 20th century... and as
recently as the 1980s, the ratio of the Dow to gold was 1 to 5 or less. Investors paid 5
ounces of gold to buy the Dow and its earnings.
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Eric: Well I think the same thing goes on in the silver market that goes on in the gold
market, except it is more obvious. When silver got to $49.50 not that long ago, it
traded over a billion ounces of paper silver in a day, and we only produce 800 million
ounces of silver in the mines a year. I always ask people to think about the guy who
sold a billion ounces of silver that day – what’s he thinking? There’s no way he can
supply it. And therefore it must be somebody who thinks that by selling the billion
ounces he can dampen the enthusiasm, which they did, of course they had the changes
in the Comex rules all at the same time which helped them.
But I think that silver will triple the performance of gold, because ultimately we will
go from a 55 to 1 ratio which we’re at today, down to 16 to 1 which was the typical
ratio. And we see lots of signs in the silver market for incredible demand. I’m just
awestruck that in the US, the US mint sells as many dollars of silver as they sell of
gold, which means they are selling 55 times as many ounces of silver as gold. And yet
the mines only produce 11 times more. I mean something’s got to give here. We can’t
have the world buying 55 times more silver than gold, when quite frankly for
investment its only available three ounces of silver for every ounce of gold, as most
silver is used for industrial purposes.
silver stocks have underperformed the metal by 28%! It’s 28 Mar
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If you put all of the gold in the world that is above ground and compare it to the
known silver above ground, the ratio is 150 times more gold than silver....
So if people keep buying silver at a 1/1 ratio with gold, which the US Mint data
shows, obviously there is a time when the silver shortage will present itself. You
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The reason I think it'll happen in silver is that the silver market's so small," Sprott tells
us. Yet U.S. Mint statistics reveal people are plowing as many dollars into silver
purchases as gold. At current prices, "They're buying 50 times more physical silver
than gold [measured in ounces]."
This makes the supply-demand squeeze even more glaring than it is with gold:
Measured in ounces, annual world production of silver is 11 times that of gold.
What's more, "There's only about a 3-to-1 ratio of the silver that's available for
investment, because a lot of silver goes into industrial production," Sprott says. "So
you can't buy 50 times more as investors when it's available only 3-to-1. Sooner or
later, there's going to be a shortage."
The supply squeeze has smoothed out... this time. But sooner or later, Sprott is
convinced, the system will break down... a major commodity exchange will default on
a silver contract... and the price of physical silver will break away from the price you
see on CNBC's ticker.
At $28.77 this morning, silver is an excellent buy in the estimation of DoubleLine
Capital's Jeffrey Gundlach.
It was Mr. Gundlach who offered the two charts we shared on Monday showing the
parallels between central bank balance sheets and the gold price. He likes silver even
more because it's more volatile -- a good thing when prices are rising!
"Silver was very much in favor two years ago," he said in a recent webcast. "Now it's
very out of favor." He wouldn't be drawn on a price target... but we'll note here that
silver came within a hair of $50 two years ago.
Other more mainstream sources are also issuing bullish silver forecasts...
$33 this year (HSBC)
$37 this year (Deutsche Bank)
$35 next year (Morgan Stanley)
$37 within the next three months (UBS).
Every indication is that silver supply remains tight. "Almost every dealer is now
quoting four-six weeks delivery after payment for orders of any size," writes
Michigan-based dealer Patrick Heller at Numismaster.
Silver Maple Leaf coins are proving more scarce than Eagles: "Most wholesalers are
now quoting shipments about two weeks out, which means about a three-week
delivery delay to a retail customer." But for the moment at least, premiums on both
Canadian and U.S. silver coins are at normal levels.
Meanwhile, several dealers are offering premiums of 7% over spot if you want to
unload any of your pre-1965 U.S. dimes, quarters or half-dollars.
"I don't expect the huge imbalance between supply and demand for physical silver to
end until the spot price is much higher," Heller concludes. "At the most optimistic, we
could see some turnaround once the spot price reaches $32. By the time silver tops
$35, I think we will definitely see some evening out of supply and demand."
While a rush is on to acquire physical silver, stock market investors ignore silver
mining stocks. Sold off to a cheap valuation, the silver miner we feature in today's 5
PRO looks ready for another move higher.
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Like gold, silver is – or was – a monetary metal. So its attraction is clear in these
times of monetary intervention and currency debasement. (In some 90 or more
different languages, the words silver and money are interchangeable: ‘argent’ in
French, ‘plata’ in Spanish, ‘shekel’ in Hebrew, for example. The pound actually once
meant a pound weight of sterling silver.)
In 2011, world silver production stood at 23,688 tonnes. Demand, however, stood at
32,366 tonnes – meaning there was a deficit of 8,678 tonnes. This deficit is about
average for the last 20 years. Currently it is met by existing stock. Below, courtesy of
Nick Laird of sharelynx.com, we see production, demand and deficit since 1950.
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Here’s a chart showing 10 years of newsletter sentiment compared to the S&P 500.
Whenever the sentiment reading pops above 70%, the broad market has pulled back to
some degree on a consistent basis. As of the most recent reading, bullish sentiment is
topping post- financial crisis highs.
Russia's central bank has loaded up on more gold in the last decade than even China,
according to IMF figures crunched by Bloomberg News.
"When Vladimir Putin says the U.S. is endangering the global economy by abusing its
dollar monopoly," Bloomberg reports this morning, "he's not just talking. He's betting
on it."
Russia has loaded up on 570 metric tons over the last decade -- a quarter more than
China.
"Yes... I think I'd rather hold this than a fistful of dollars..."
Of course, we're going by official figures here. China's unofficial totals are
undoubtedly bigger.
"By my calculations, China could be sitting on more than 7,000 tonnes of gold
today," says Matt Insley at Daily Resource Hunter.
As we've noted periodically, India's government is doing its best to discourage
ownership of physical gold -- including an increase in the duty on gold imports over
the last year from 1% to 6%.
No matter: Total imports rose from 900 metric tons in 2011 to 950 last year. And 250
metric tons were smuggled, according to the best guess of the All India Gems and
Jewellery Trade Federation.
"The hike in customs duty did not stop gold imports into India," says federation
chairman Bachhraj Bamalwa, "but only changed the route as smugglers earn a profit
of around Rs 200,000 ($4,000) on every kilogram of gold smuggled into the country."
"Currency War? Here's How to Hedge It With Gold" reads a headline we never
expected to see at CNBC's website.
"As leaders from around the world meet this week to discuss fears of competitive
currency devaluations," the story reads, "analysts told CNBC the currency war could
lead to a sharp rise in gold prices in the second half of this year, after a falloff in the
first half."
Said falloff might be under way this morning. The mere hint of a "joint message"
and similar jawboning coming out of the G-20 has sent gold tumbling to $1,651 -- a
low last seen the first week of this year. Silver has slid to $31.07.
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The world currency system is riding down the road to catastrophe, says James
Rickards, senior managing director of Tangent Capital Partners.
The world already has entered a currency war that began in 2010 on the heels of the
Federal Reserve’s massive easing program, he tells Wall Street Journal Digital
Network. Since then, plenty of nations have joined in, including Brazil, Switzerland
and Japan, says Rickards, author of “Currency Wars: The Making of the Next Global
Crises.”
“All major central banks are easing,” he says. “Eventually so much money will be
printed that this will lead to inflation. The endgame is collapse of the international
monetary system — sometime sooner than later.”
His currency view makes Rickards a huge bull on gold. His long-term price estimate
is $7,000 an ounce, more than four times the current price of $1,677. Gold could trade
in a range between $3,000 and $10,000, Rickards says. “We’re not going to get there
all at once.”
x
None of these theories are substantiated, but no matter how you slice it, Germany’s request
for its gold does not bode well for the future of the dollar. In fact, the Bundesbank’s official
statements are all you need to confirm the Germans’ waning faith in the US.
The financial world was shocked this month by a demand from Germany’s Bundesbank to
repatriate a large portion of its gold reserves held abroad. By 2020, Germany wants 50% of
its total gold reserves back in Frankfurt — including 300 tons from the Federal Reserve. The
Bundesbank’s announcement comes just three months after the Fed refused to submit to an
audit of its holdings on Germany’s behalf. One cannot help but wonder if the refusal
triggered the demand.
Either way, Germany appears to be waking up to a reality for which central banks around the
world have been preparing: the dollar is no longer the world’s safe-haven asset and the US
government is no longer a trustworthy banker for foreign nations. It looks like their fears are
well-grounded, given the Fed’s seeming inability to return what is legally Germany’s gold in a
timely manner. Germany is a developed and powerful nation with the second largest gold
reserves in the world. If they can’t rely on Washington to keep its promises, who can?
Where is Germany’s Gold?
The impact of Germany’s repatriation on the dollar revolves around an unanswered question:
why will it take seven years to complete the transfer?
The popular explanation is that the Fed has already rehypothecated all of its gold holdings in
the name of other countries. That is, the same mound of bullion is earmarked as collateral
for a host of different lenders. Since the Fed depends on a fractional-reserve banking system
for its very existence, it would not come as a surprise that it has become a fractional-reserve
bank itself. If so, then perhaps Germany politely asked for a seven-year timeline in order to
allow the Fed to save face, and to prevent other depositors from clamoring for their own
gold back — a ‘run’ on the Fed.
Now, the Fed can always print more dollars and buy gold on the open market to make up for
any shortfall, but such a move could substantially increase the price of gold. The last thing
the Fed needs is another gold price spike reminding the world of the dollar’s decline.
The whole situation mirrors the late 1960s, during a period that led up to the “Nixon Shock.”
Back then, the world was on the Bretton Woods System — an attempt on the part of
Western central bankers to pin the dollar to gold at a fixed rate, while still allowing the metal
to trade privately as a commodity. This led to a gap between the market price of gold as a
commodity and the official price available from the Treasury.
As the true value of gold separated further and further from its official rate, the world began
to realize the system was unsustainable, and many suspected the US was not serious about
maintaining a strong dollar. West Germany moved first on these fears by redeeming its
dollar reserves for gold, followed by France, Switzerland, and others. This eventually
culminated in Nixon “closing the gold window” in 1971 by ending any link between the
dollar and gold. This “Nixon Shock” spurred chronic inflation throughout the ’70s and a
concurrent rally in gold.
Perhaps the entire international community is thinking back to the ’60s, because Germany
isn’t the only country maneuvering away from the dollar today. The Netherlands and
Azerbaijan are also discussing repatriating their foreign gold holdings. And every month, we
hear about central banks increasing gold reserves. The latest are Russia and Kazakhstan, but
in the last year, countries from Brazil to Turkey have been adding to their gold holdings in
order to diversify away from fiat currency reserves.
And don’t forget China. Once the biggest purchaser of US bonds, it is now a net seller of
Treasuries, while simultaneously gobbling up gold. Some sources even claim that China has
unofficially surpassed Germany as the second largest holder of gold in the world.
Unlike the ’60s, today there is no official gold window to close. There will be no reported
“shock” indicator of a dollar flight. This demand by Germany may be the closest indicator
we’re going to get. Placing blame where it’s due, let’s call it the “Bernanke Shock.”
x
Past & Future Speculative Bubbles –
What They Indicate for Gold and
Silver!
Posted by Deviant Investor on January 28th, 2013
(January 2013)
This is not a prediction of future prices of gold and silver; it is an indication of what
could happen in a speculative bubble environment based on the history of previous
bubbles.
I’ll summarize a simple analysis of past bubbles.
Definitions

Bubble: A speculative mania in a market that is priced well beyond what the
fundamentals and intrinsic value indicate.

Phase 1: The first phase of the bubble begins with the price bottoming and
initiating a long rally. It is often indicated by a triggering event such as Nixon
closing the “gold window” on August 15, 1971 – the beginning of the gold and
silver bubbles that terminated in 1980. The market rallies for some years, hits
a new “all-time” high, and then corrects.
When the market proceeds into a bubble phase, it rallies beyond that new high
and continues much higher. The end of phase 1 and the beginning of phase 2
are the point at which the market rallies from its correction low and exceeds its
previous high. See the graph of the silver market with the indicated beginning
and end points for phase 1 and phase 2.
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Survival Investing with Gold & Silver
by GE Christenson – aka Deviant Investor
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
Phase 2: The final phase of the bubble starts when the price exceeds the “new
high” and then rallies to a much higher and unsustainable level.
Click on image to enlarge.
I looked at the time and price data for the South Sea Bubble in England from 1719
-1720, the silver bubble from August 1971 to January 1980, the NASDAQ bubble
from August 1982 to March 2000, the Japanese Real Estate bubble from 1965 to
1991, the gold bubble from August 1971 to January 1980, and the S&P mini-bubble
from August 1982 to March of 2000. A spreadsheet will not display well, so I’ll list
my results. Please realize that all prices and dates are approximate – this is “big
picture” analysis.
The conclusion is that bubbles start slowly and then accelerate to unsustainable
highs (on large volume) that are largely created by greed and fear but not
fundamental evaluations. Bubbles generally follow the “Pareto Principle” where
approximately 80% of the price move occurs in the LAST 20% of the time.
Consider:
South Sea Bubble: (Extreme price bubble)

Phase 1: January 1719 to March 1720. Price from $120 to $180.


Phase 2: March 1720 to July 1720. Price from $180 to $900.
Time: Phase 1 – 75%, phase 2 – 25%.

Price: Phase 1 – 8%, phase 2 – 92%. Phase 2 price ratio: 5
Silver Bubble: (Extreme price bubble)


Phase 1: August 1971 to March 1978. Price from $1.50 to $6.40.
Phase 2: March 1978 to January 1980. Price from $6.40 to $50.
Time: Phase 1 – 78%, phase 2 – 22%.

Price: Phase 1 – 10%, phase 2 – 90%. Phase 2 price ratio: 7.8

NASDAQ Bubble: (Extreme price bubble)

Phase 1: August 1982 to February 1995. Price from $168 to $780.


Phase 2: February 1995 to March 2000. Price from $780 to $4,880.
Time: Phase 1 – 71%, phase 2 – 29%.

Price: Phase 1 – 13%, phase 2 – 87%. Phase 2 price ratio: 6.3
Japanese Real Estate Bubble: (approximate numbers)

Phase 1: 1960 to 1979. Price Index from 4 to 50.


Phase 2: 1979 to 1991. Price Index from 50 to 225.
Time: Phase 1 – 61%, phase 2 – 39%.

Price: Phase 1 – 21%, phase 2 – 79%. Phase 2 price ratio: 4.5
Gold Bubble:


Phase 1: August 1971 to July 1978. Price from $40 to $200.
Phase 2: July 1978 to January 1980. Price from $200 to $870.
Time: Phase 1 – 82%, phase 2 – 18%.

Price: Phase 1 – 19%, phase 2 – 81%. Phase 2 price ratio: 4.4

S&P Bubble: (Mini-bubble)


Phase 1: August 1982 to February 1995. Price from $100 to $483.
Phase 2: February 1995 to March 2000. Price from $483 to $1,574.
Time: Phase 1 – 71%, phase 2 – 29%.

Price: Phase 1 – 26%, phase 2 – 74%. Phase 2 price ratio: 3.3

Summary
Bubbles tend to follow the 80/20 ratio indicated in the Pareto Principle. Phase 1 takes
approximately 70-80% of the time and covers approximately 10-20% of the total price
change. Phase 2 accelerates so that it takes only 20-30% of the time but covers
80-90% of the price change. Extreme bubbles such as the South Sea Bubble and the
Silver bubble experience approximately 90% of the price change in the 2nd phase.
The ratio of the phase 2 ending price to beginning price is typically 4 to 8 – a huge
price move. Such bubbles are rare; the subsequent crash is usually devastating.
Future Bubbles
In the opinion of many analysts, sovereign debt is an ongoing bubble that could burst
with world-wide consequences. Should deficit spending and bond monetization
(Quantitative Easing) accelerate in the next several years, as seems likely, that
sovereign debt bubble will inflate further. Because of the massive printing of dollars,
the value of the dollar must fall, particularly against commodities such as oil, gold,
and silver. As the purchasing power of the dollar falls, an increasing number of people
will realize their dollars are losing value, and those people will seek safety for their
savings and retirement. Gold and silver will benefit from an increasingly desperate
search for safety as a result of the decline of the dollar. Assuming the 80/20 “rule”
and the phase 2 price change ratio of approximately 5, what could happen if gold
and silver rise into another speculative bubble?
Assume that silver began its uptrend in November 2001 at $4.01 and that gold began
its move in April 2001 at $255. Silver rallied to nearly $50 in 2011, and gold also
rallied to a new high of about $1,900 in 2011. Assume that both surpass those highs
about mid-2013 and accelerate into phase 2 thereafter. Using these assumptions, phase
1 for silver would measure 12.5 years and phase 2 could last until approximately late
2016 – early 2017. If we assume that phase 1 was a move from $4 to $50 and that
represents 19% of the total move, the high could be around $250. The ratio of
phase 2 ending price to beginning price would be 5:1 – reasonable.
Indications for gold suggest a similar end date and a phase 2 bubble price of
perhaps $9,000 per ounce. The ratio of phase 2 ending price to beginning price
would be 4.7:1 at $9,000.
The gold to silver ratio at these bubble prices would be approximately 36, much
higher than the ratio from 1980. Perhaps silver would “blow-off” higher, like it did in
1980, and force the gold to silver ratio lower or perhaps gold might not rally so high.
Time will tell.
Outrageous?
Well, yes, at first glance, those prices do seem outrageous. But consider for
perspective:





Apple stock rose from about $4 in 1997 to over $700 in 2012.
Silver rose from $1.50 to $50.00 in less than 10 years.
Gold rose from about $40 to over $850 in less than 10 years.
Crude oil rose from less than $11 in 1998 to almost $150 in 2008.
The official US national debt is larger than $16,000,000,000,000. The
unfunded liabilities, depending on who is counting, are approximately
$100,000,000,000,000 to $230,000,000,000,000. Divide $200 Trillion by
approximately 300,000,000 people and the unfunded debt per capita of the



United States is approximately $700,000. That is outrageous!
The official national debt increases in excess of $3,000,000,000 per day, each
and every day. The unfunded liabilities increase by perhaps five – ten times
that amount. Outrageous!
We still pretend the national debt is not a problem and that it will be “rolled
over” forever. That is outrageous.
Argentina has revalued their currency several times in the last 30 years – they
have dropped 8 zeros off their currency since 1980. Savings accounts and the
middle class were devastated several times. It can happen again.
Given the above for perspective, is gold at $5,000 to $10,000 per ounce
unreasonable or impossible? Is silver at $200 to $400 per ounce unreasonable or
impossible? Past bubbles have had an ending price 4 – 8 times higher than the phase
2 beginning price, so history has shown that such prices for gold and silver are indeed
possible. Possible is not the same as certain – but these bubble price indications are
certainly worth your consideration.
x
Steep growth in India's silver exports is outpacing its other trade in precious metals as
world demand picks up, albeit for cheaper jewellery options.
Shipments are likely to rise by up to 30 percent this year, trade body officials said on
Tuesday
"At such high prices, gold is going out of budget for many youngsters ... a wrist
bracelet of white gold is now replaced with sterling silver as it is cheaper," said
Pankaj Kumar Parekh, vice-chairman of the Gems and Jewellery Export Promotion
Council (GJEPC).
Shipments of gems and jewellery constituted 14 percent of India's total exports, and
employ 3.4 million workers, with the Middle East taking most of the market.
x
During the Cold War, Germany moved much of its gold to New York in case the
USSR invaded Germany. It was assumed at that time that the US would be a safer
storage location, and of course, they could always ask to have it returned if they
wished.
But German citizens have become increasingly worried about the security of the
1,536 tonnes of German gold reputedly held at the Federal Reserve in New York. This
has resulted in the Bundesbank pursuing repatriation of the gold, beginning with a
request to view it in the basement of the Federal Reserve Building, where it is claimed
to reside.
Of course, the German government had received periodic assurances from the Fed
that the gold is there; however, the issue began to get a bit sticky recently, when the
Fed refused a request for inspection.
The world then raised a collective eyebrow, and, whilst not panicking over this
development just yet, closer attention has come to bear, not only on the Fed, but on
any institution that is entrusted with the storage of gold for other parties.
Concern spread to Austria, where a question arose in Parliament as to where Austria’s
gold is stored. The answer provided was that 80% of it (224.4 tonnes) is in the UK. (It
was claimed that the reason for this is that, if a crisis of some kind were to occur, it
could be more easily traded from London than from Vienna.)
Seems reasonable enough, except that the return of the gold to Austria, if it were
requested, may be a bit difficult, as the gold seems to have been leased out by the UK.
Not to worry, it’s done all the time. In fact, the practice has been endorsed by none
other than Alan Greenspan, former Chairman of the Fed. The gold is leased to a
bullion bank, which typically pays one percent interest to the Fed, with a promise to
return it on a specified date. The bullion bank then sells the gold on the open market
and uses the proceeds to buy Treasury bonds, which will net a three to four percent
return.
The nicest thing about such an arrangement is that the lessor continues to claim it on
his balance sheet as a line item: “gold and gold receivables.” After all, an asset that we
have leased out is still an asset, even if it has now been sold by the lessee.
In effect, this means that, if you bought a gold bar today, it is possible that it is a bar
that was shipped from the Bundesbank to the Federal Reserve decades ago and is
presently listed by the Fed on its balance sheet as “gold and gold receivables.”
Both you and the Fed are claiming to possess the same gold bar. The fly in the
ointment, of course, is that only one bar can be the actual bar. The other is a
receivable and therefore is an asset on paper only. This, of course, means that there is
less gold in the world than has been claimed. How much less? That’s anyone’s guess.
The New Risks
But even if it became generally known that the Fed (and others) are holding paper,
rather than physical gold, couldn’t we carry on as before? What could go wrong? Here
are some immediate possibilities:
If there were a dramatic rise in the price of gold and the lessor were to call in the
return of the gold by the bullion bank, the bullion bank could easily lose far more than
the small two to three percent margin it had been enjoying.
If there were a crash in the bond market and hyperinflation set in, the bonds that the
bullion bank had purchased could become worthless.
If the nations who shipped their gold to London and New York for safekeeping were
to request their return, the storage banks could only deliver if they were to purchase
gold at the current rate. If that rate were significantly above the rate at which the gold
had been leased to the bullion banks, the storage banks would sustain a significant,
possibly unsustainable, loss.
That’s quite a bit of risk.
In the present market, there are any number of possible triggers that could cause the
people of Germany, Austria, or a host of other nations to demand that their gold be
returned home. Indeed, pressure is on the increase. The governments who have
shipped out their gold for “safekeeping” would have a lot of explaining to do to their
constituents, if the storage banks are not forthcoming.
The Bundesbank should, of course, now say, “I’m afraid that’s not good enough. It’s
our gold. We’ve advised you how much of it we want back now, and we must insist
that you produce it immediately.”
If they were to take this perfectly logical step and the Fed refused, there could be a
run on the banks, and, very possibly, within as short a period as twenty-four hours, a
worldwide bank holiday might be declared with regard to gold.
However, this is not what will transpire. Neither logic nor sound banking practices are
the object here. The object is to maintain the charade that exists within the banking
community. The Bundesbank is just as fearful of a run as the Fed and will be only too
willing to accept the Fed’s terms.
What must be borne in mind is the root cause of the request. It was not the
Bundesbank itself that originally wanted the transfer to take place; it was the German
people who, quite rightly, have become distrustful of the fact that their gold has been
in New York for so long and want to see it repatriated. It is not the banks who wish to
correct the situation. Not one bank wishes to expose the inappropriate practices of any
other bank. Their loyalty is to each other and not to their depositors.
In the near future, we may well find that a significant amount of gold that is claimed
to exist in the world will “disappear.” Whilst we cannot control this eventuality, we
may be able to save the gold that is being held in our names from disappearing.
Germany's gold stash represents roughly 10% of the world's gold reserves,
Bundesbank points out that half of Germany's gold will remain in New York and
London (the US portion of reserves will only be reduced from 45% to 37%).
Netherlands and Azerbaijan may move their gold back home. If
Hugo Chávez did the same thing in late 2011, repatriating much of his country's gold
reserves from London
To this end, the Bundesbank is planning a phased relocation of 300 tonnes of gold
from New York to Frankfurt as well as an additional 374 tonnes from Paris to
Frankfurt by 2020.
emerging-country central banks are accumulating gold just as fast as they possibly can,
as insurance against problems in the world of fiat currency; and those problems are
liable to get bigger with each crank of the printing press.
x
(Mineweb): Last week, a report by Germany's Federal Auditors Office was made
public by the media including the Associated Press. The document observed
Germany's gold bars "have never been physically checked by the Bundesbank itself or
other independent auditors." Instead, it relies on "written confirmations by the storage
sites."
This disconnect seems to be lost on most market participants (as the strangely muted
reaction of the gold price after the FOMC announcement demonstrates), but, with the
amount of gold in the world increasing by roughly just 2% per year, the incredible (in
the truest sense of the word) increase in the monetary base is one day going to be seen
for what it is, and the mathematics of the situation will permeate the collective
consciousness.
In closing, I'll just point out that, in roughly 6,000 years of recorded history,
approximately $8 trillion of gold (at today's price) has been mined.
On August 31, 2008, the combined value of the balance sheets of the US, UK, ECB,
Germany, France, China, and Switzerland stood at $8.16 trillion. By October 31, 2011,
that total had reached $15.05 trillion.
In other words, it took eight central banks about five years to fabricate the equivalent
value of 6,000 years' worth of gold production and, since the chart below finished,
they have added another couple of trillion dollars.
Ambrose Evans-Pritchard.: Yes, I'd say it is. I mean, I think it is certainly for an
investor in gold. As you know, the Western central banks were selling short in the
gold market essentially for many, many years in the late 1990's until the early part of
this decade, and they are—or were—a major force in the global gold market.
But of course these days the Western central banks don't really have any reserves, as
you know; I mean, the Bank of England has nothing, basically.
The reserves that are being built up are all in the developing countries, they are in
China, in Taiwan and Philippines, and so on. And in the case of China, only two
percent of its reserves are in gold. I think they probably would like to target a level of
more like ten percent, as Russia has said it is already doing. I mean, given that China
has reserves of 3.2 trillion, it is going to have to buy an awful lot of gold to get there.
So I think it is incredibly important, but what the Western central banks do and the
European countries do is almost secondary. The net buyers, the ones who are really
going to influence the market, are going to be emerging economies that have far too
little gold at the moment in their portfolios and far too many dollar bonds, and
Eurobonds to a lesser extent.
They suspect that one of the ways out of this global crisis is going to be massive
monetary reflation at some point. And that means if you are holding all this stuff, you
are going to get burned, and that doesn't just apply to central banks, it applies to
anybody holding bonds frankly. If you are in government bonds in any of the Western
countries, I think you are going to get brutally burned in the next fifteen to twenty
years. If you are hoping that this is going to be your pension, you need to think again
because once inflation comes in earnest, that stuff is coming up in smoke. You can see
why people would want gold, as a big chunk of their portfolio.
Conspiracy theorists should consider foreign dollar reserve holders that would like to
take delivery of as much physical gold (and silver?) as possible in a very short time,
and do so at cheap prices. It would be simple to do: fund offshore hedge funds that
continually short gold futures through US bank accounts, thereby keeping the spot
price and London fixings down. Physical gold could then be delivered to sovereign
accounts directly from mines and through exports at the suppressed prices.
Why would sovereigns like China, Russia, even Japan and South Korea want to take
physical possession of bullion at current prices and so quickly? The short answers are
that they could not buy size required on exchanges without driving prices multiples
higher and because there is likely to be a reset of the global currency system, soon.
x
Forget Germany, its Turkey's Central-Bank we should be watching
Amid the brouhaha over Germany's gold reserves at the Bundesbank, there's another
central bank using gold actively to bolster its currency and financial stability.
The strategy looks the same – sitting on big stockpiles of the stuff. But the aim differs,
because gold is much closer to the everyday financial system. The tactics differ too.
Because the central bank hasn't bought and paid for this gold. Private citizens have.
"Although much criticised for its use of 'unconventional measures'," the Financial
Times added in December, "few would argue that the decision last year by Turkey's
central bank to allow the country’s banks to buy gold was anything less than a roaring
success."
Buying gold isn't quite right. Starting in October 2011, the central bank began
allowing commercial banks to hold a portion of their "required reserves" – needed to
reassure depositors and other creditors they had plenty of money to hand – in physical
gold bullion. Starting at 10%, that proportion was then raised to 30%.
HSBC has quietly moved into acquiring large amounts of silver bullion.
The bank has secured another deal to buy silver bars from KGHM which brings their
total purchases of silver from KGHM alone in the last 12 months to $876 million or
PLN 3.65 billion.
KGHM is one of the largest producers of silver in the world and is the second-largest
producer of refined silver in the world.
x
Instead of focusing on why the silver manipulation hasn’t already ended amid increased
demand and restrained supply, try to look at what has occurred in the real world of silver
supply and demand over the past 25 years. If silver had been manipulated and the price was
kept artificially lower over the last quarter century (as I allege) then certain supply demand
factors should reflect that. I think those factors are visible.
For one thing, there is far less above ground silver in the world than there was 25 or 75 years
ago. Twenty five years ago, there was close to three billion oz in silver bullion inventories
and seventy five years ago there was ten billion oz. Today, there’s only a bit over one billion
ounces. If silver wasn’t manipulated in price, then where did all that silver go? I didn’t say
that prices didn’t go higher (over the past 6 years or so) just that if prices weren’t artificially
depressed in price the world wouldn’t have eaten up so much of it. Further, the billion
ounces of silver bullion that does still exist is now owned by a radically different type of
owner than held silver 25 or 75 years ago. I claim these new owners are much more aware
that silver has been artificially depressed in price and that is the main reason they have
chosen to own it. This new set of owners is not interested in selling until the artificial low
price is rectified.
Yes, the mine production and consumption of silver has grown over the past 25 years, but
that’s more a function of by-product mining gains and the growth of population and world
economic growth. The lynchpin is the drop in inventories from 25 and 75 years ago. If silver
weren’t artificially depressed in price, that wouldn’t have occurred. This article is about
silver, but I can’t help but highlight the difference between silver and gold. Whereas silver
inventories had declined drastically (until recently), world gold inventories have done
nothing but expand over every time period.
x
History shows that bull markets tend to end in a climactic blowoff top. For example,
gold rose 120% in 1979. Our best year was 32% in 2007. Hardly meteoric, and
contrary to how the typical bull market culminates."
Other central banks then worry about the 'strength' of their own currencies. They'll
retaliate, beef up their trading desks, print their own currencies and buy bonds and
other assets denominated in trade competitors' currencies."
"Ironic, isn't it?" asks Dan, "Rather than fight trench warfare, as in WWI, economic
competitors are funding each other's budget deficits through their own central banks.
This is a recipe for continued growth (or nonreform) of the bankrupt welfare state and
slow suffocation of the private sector: governments borrow at near-zero rates from
eager bond buyers at central banks; international trade grinds to a halt amid the chaos.
"Is a reversal of globalization in the works? Will central banks usher in the end of the
'global economy' and spark the resurgence of intracountry trade within closed
borders?
"Once this starts, nobody can predict how it will end. But there will be chaos in the
foreign exchange markets. The academic arguments to take paper money seriously,
already losing credibility, will become laughable."
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Why are (Smart) Investors Buying 50 Times More Physical Silver than Gold?
By: Eric Sprott
As long-time students of precious metals investing, there are certain things we
understand. One is that, historically, the availability ratio of silver to gold has had a
direct influence on the price of the metals. The current availability ratio of physical
silver to gold for investment purposes is approximately 3:1. So, why is it that
investors are allocating their dollars to silver at a much higher ratio? What is it that
these “smart” investors understand? Let’s have a look at the numbers and see if it’s
time for investors to do as a wise man once said and “follow the money.”
Average annual gold mine production is approximately 80 million ounces, which
together with an estimated average 50 million ounces of annual recycled gold, totals
around 130 million ounces available per year. In comparison, annual mined silver
production has averaged around 750 million ounces, while recycled silver is estimated
at 250 million ounces per year, which adds up to approximately 1 billion ounces.
Using this data, there is roughly 8 times more silver available to buy than there is gold.
However, not all gold and silver is available for investment purposes, due to their use
in industrial applications. It is estimated that for investment purposes (jewelry, bars
and coins), the annual availability of gold is roughly 120 million ounces, and of silver
it is 350 million ounces. Therefore, the ratio of physical silver availability to gold
availability is 350/120, or ~3:1.1
Now, let’s examine how investors are allocating their investments between gold and
silver. The data below is from the US Mint showing gold and silver sales in ounces:
Source: US Mint (www.usmint.gov)
As you can see, investors are choosing to buy silver at a ratio to gold that is well
above what is available. This uptrend doesn’t show any signs of slowing either. The
ratio of the physical silver to gold is both rising and extraordinarily above the
availability ratio of 3:1.
We can also use other data such as the most recent issues of the Sprott Physical Gold
and Silver Trusts. The last Gold Trust issue in September 2012 raised US$393 million
and the last Silver Trust issue raised US$310 million. On the basis of prices for each
metal at the time of issue, we could purchase ~213 thousand ounces of gold and ~9.1
million ounces of silver. This represents a purchase ratio of 43:1.
If we examine ETF holdings in both gold and silver, we note that in the period from
2007 to 2012, the increase in silver holdings amounted to 12,000 tonnes, compared to
1,200 tonnes of gold – meaning, investors purchased ten times more silver than gold.
These are only three factual data points to consider, but there are other indications that
silver investment demand is way out of line with availability. Our favourite question
to the bullion dealers we meet, is to ask the ratio of their dollar sales in gold versus
silver. The answer is that dollar sales are equal, which means that physical silver sales
relative to gold are greater than 50:1.
A recent news headline on Mineweb read, “Silver Sales to Outshine Gold in India.2”
It went on to quote a bullion dealer that “investors and jewelry lovers prefer silver
jewelry these days.” As the largest importer of gold in the world, it would be
impossible for India to purchase an equivalent amount of silver, as it would require
more than one billion ounces, essentially more than the current annual mine
production.
While these last two confirmations of silver demand are anecdotal, the statistics from
the US Mint, the ETFs, and our Physical Trust issues, are factual.
For the time being, the silver price is essentially set in the paper market where the
daily average trade on the Comex is approximately 300 million ounces. An
outrageous number when you compare it to the daily mine production of about 2
million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading
Commission stated on October 26, 2010, “I believe there have been repeated attempts
to influence prices in silver markets. There have been fraudulent efforts to persuade
and deviously control that price. Based on what I have been told and reviewed in
publicly available documents, I believe violations to the Commodity Exchange Act
have taken place in the silver market and any such violation of the law in this regard
should be prosecuted.”3
Which brings us back to the phrase “Follow the money.” In our view, it is almost
inconceivable that investors would allocate as many dollars to silver as they would to
gold, but that is what the data shows.
The silver investment market is very small. While the dollar value of gold in the
world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars
and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce).
This is a ratio of 60:1 in dollar terms.4
How long can investors continue to buy silver at the current ratios when the
availability for investment is only 3:1? We are surprised that the price of silver has
remained at such a depressed level compared to gold. Historically, the price ratio
between gold and silver has been 16:1, when both were currencies. Today the ratio is
55:1, so what are the numbers telling us? We believe this is one of those times when
smart investors will be well rewarded to “Follow the money.”
x
When the euro advances, as it's been doing, its mirror competitor, the dollar, usually
declines. When the dollar declines, gold usually rallies. But that's not happening
now. As the dollar declines, gold declines with it. Patience ... I think matters will
return to normal and gold will rally with the euro.
The number one question I'm receiving from subscribers and friends is this -- “Where
should I put my money?” My constant answer is, “put it somewhere where you won't
lose it.” I think one-third to one half of your assets in gold bullion coins and the rest
in cash (money market funds or CDs) makes sense to me. Here are a few funds that I
like -- PIMCO All Asset all Authority Fund (PAUDX), PIMCO Commodity Real
Return Strategy Fund (PCRIX), PIMCO UNCONSTRAINED BOND FUND
(PUBDX).
x
"Central banks, particularly in the emerging economies, are looking to increase the
proportion of gold in their reserve assets," analyst Alexandra Knight from National
Australia Bank tells Bloomberg. "That will drive prices of gold because they can be
quite significant purchases."
Indeed, gold makes up a much smaller share of foreign exchange reserves in emerging
economies. Before its most recent purchase, Brazil held only 0.5% of its reserves in
gold, compared with the official U.S. figure of 77%. And after this purchase, Brazil
ranks a mere 41st among the world's nations in gold holdings.
Sounds as if Brazil is getting serious about building up its armaments for the
"international currency war" the country's finance minister decried two years ago.
Private investors in Switzerland, Austria and Germany are lining up to buy gold bars
the size of a credit card that can easily be broken into 1 gram pieces and used as
payment in an emergency," according to Reuters.
x
Chancellor of the Exchequer Gordon Brown participated in the most famous market
timing fiasco by emptying much of Britain’s gold stash below $300 per ounce.46 That
got him promoted to Prime Minister.
JPM’s commodity guru, Blythe Masters, began denying the silver short, claiming that
JPM’s silver positions were simply hedges for their customers.48 Why would silver
bulls hedge their investments? Data from the Office of the Comptroller of the
Currency brought to light by Rob Kirby eventually showed that JPM has a whopping
$18 billion naked short position in silver,49,50 corresponding to 50% of the estimated
global above-ground silver supply.51 Naked shorting on such a scale is both illegal
and reckless.52 To the extent that JPM is at risk, taxpayers are at risk. CFTC
Commissioner Bart Chilton unabashedly claims that big money with outsized short
positions are moving the silver market, although he won’t name names yet and hasn’t
done squat.53 Let me help you out Bart: Start with JPM.
Hedge fund managers supporting gold with dire warnings of monetary chaos included
luminaries George Soros, John Paulson, David Einhorn, Jim Rogers, Ray Dalio, and
Kyle Bass. Bill Gross, head of PIMCO with almost two trillion dollars under
management, noted gold “will be higher than it is today and certainly a better
investment than a bond or stock, which will probably return only 3% to 4% over the
next 5 to 10 years.”
Central banks became net buyers starting in 2009 after years of selling and have been
increasingly aggressive (Figure 11).54 Chinese and Korean central bankers have
explicitly stated gold is the only safe asset.55 Such reports are picking up in intensity.
Other events seemed new to 2012. The International Monetary Fund (IMF) has
flipped to net buyer.56 South Korea, Paraguay, Turkey, Vietnam, and Russia all
increased their gold holdings. Iran swaps oil for gold with China and Turkey.57,58
Gold may soon be designated a Tier 1 asset. It is beginning to act like a currency.
x
GEOFF CANDY: From a gold market point of view, there was an announcement out of China's Ministry of
Industry and Information Technology on Monday, saying the country is aiming to produce between
420-450 tonnes of gold output in 2015, up about 25 percent from last year's numbers, their consumption is
expected to reach around 1,000 tonnes, clearly this is an ever-increasingly important market for the metal,
how, if at all, is it going to be impacted by these changes.
GRANT WILLIAMS: There has been a steady flow, of gold from West to East and, the Chinese, make no
bones about it, they fundamentally understand the need to own gold right now. and, so, the Chinese
central bank has been accumulating gold steadily and as rapidly as they possibly can over the last number
of years. they don't release their official holdings very often, the last time they did so was in 2009 when
they said they had a 1,054 tonnes of gold, at that point it was about a 76% increase in their holdings and it
put a real fire under the gold price which ran up about 20% on the back of that announcement. Now, as
you say, they are looking to produce about 450 tonnes which is about 50% of their acknowledged gold
holdings in a single year by 2015. So, I don't think anyone that pays attention to the gold market is under
any illusions that the Chinese holdings are significantly higher than 1054 tonnes. But, as with all of these
things, it takes these announcements to become official for people to actually sit up and take notice of it. I
don't think the Chinese are in any hurry to announce their gold holdings. I think they are steadily trying to
accumulate as many ounces as they possibly can. They are the world's biggest producer now and not an
ounce of that leaves the country, certainly not through legal means, so as long as China can produce as
much gold as it can and import as much as it can - if you look at the number of gold imports into China from
Hong Kong, the increase has been absolutely staggering. They are trying to get their hands on as much
gold as they can and I think that is going to continue going forward. They are the only major country in the
world that actively encourages their citizens to buy and own gold and I think China really gets the joke here
whereas a lot of the Western central banks either don't or aren't in a position to.
GEOFF CANDY: One definitely sees a trend of a move from West to East as power moves from west to
east so gold tends to move with it, in terms of the actual percentage of reserves, however, there has been
a lot of talk that China is looking to try to increase its gold holdings to the same level of reserves as other
western countries, that would be a significantly higher amount of gold than they have now, are we ever
going to see China with that much gold as part of their reserves?
GRANT WILLIAMS: If you could offer China the chance, in a once-off transaction, to trade their dollars for
the kind of gold reserves that the west has, they would bite your arm off. Currently, the average for the US,
Germany, Italy, France, the big holders, they are up in the mid 70s in terms of percentage of their reserves
in gold; that 1054 tonnes back in 2009, represented 1.8% of China's reserves. They had a hell of a long
way to go then, they still have a hell of a long way to go now. If you run the numbers and you work out that
they basically soak up every ounce of gold produced in the world every year, it would still take them a
couple of decades to get anywhere near to Western levels of gold. So, they would love to do it, they are
doing it as slowly and stealthily as they can without trying to sound any alarm bells because if people get
the joke it is going to cause panic and the gold price is going to go significantly higher.
GEOFF CANDY: Grant, talking about panic in the gold market, there was some concern about the
implications of the repatriation of gold by Venezuela, we do seem to be seeing countries wanting more
control over their gold holdings, there was demand out of Germany that they audit their gold holdings,
citizens wanting to know how much gold is held in vaults. Is this a trend that is likely to continue, do you
think?
GRANT WILLIAMS: This is a really interesting phenomenon that is starting to pick up some pace now. As
you say, it started with Venezuela back in August 2011. At the time Hugo Chavez demanded that 99
tonnes of gold get repatriated to Venezuela from the vaults beneath the Bank of England and, I said at the
time, this risks starting a very dangerous game of musical chairs because there are all kinds of conspiracy
theories about the fact that a lot of these central bank vaults don't contain the amount of gold that they say
they do. The gold has been leased out over the years to try and generate an income, so the gold doesn't
sit where it is supposed to sit. And, if Chavez asks for his 99 tonnes of gold back and there is any truth, any
truth whatsoever, to these rumours about there not being as much gold in central bank vaults as
advertised, it only takes a few central banks to start saying, you know what, just to be on the safe side we
will have all our gold at home. and, right now, the bulk of the world's gold is stored at Westpoint
underneath the Federal Reserve in New York and in the Bank of England. And, what we have seen in the
last few months alone is that Germany asking for a full audit and potential repatriation of their gold, we
have seen in Holland a big petition asking for the same thing. And, once this game of musical chairs
begins, you wouldn't want to be the last central banker to dive for a chair. Just in case. If there is any truth
to these rumours, why would you take the chance that they are correct? It is just a very dangerous game to
play. So, I think we will see this pick up and it can either cause some ructions in the gold market or it could
disprove a whole lot of conspiracy theories. Either way, clarity is all that investors want; if all the gold is in
fact where it is supposed to be that is great, we can all process that and move on. But, if it does turn out
that there is a shortfall then all hell is going to break loose.
x
Further, while some point to the growth in production since 2008, output is still 12.8%
below the year 2000 level. And there are reasons to believe the gap between global
mine production vs. mine production excluding China could widen. MarketWatch
reports that China's Ministry of Industry and Information Technology has said that
China wants domestic gold production to reach 14.5 million ounces by 2015, an
increase of approximately 25% over last year's levels. Given that what's produced in
the country stays in the country (where there is escalating domestic consumption), a
"widening of the fundamental market shortage," as per the MarketWatch article,
seems almost certain.
Total gold supply has been growing since 2006, reaching a record of 120 million
ounces in 2011. However, as you likely know, China's consumption is second only to
India's – and could soon reach number one. China's gold imports from Hong Kong
have soared, hitting a record 13.5 million ounces last year, with 16.5 million ounces
imported through August of this year. Upon adjusting for China's imports, gold supply
for countries outside China has actually been falling since 2009!
That's Not All
Another trend to take in to account is China's growing interest in natural resources –
basic materials, energy, and others. What gets underreported, however, is that the
Chinese are also purchasing gold mines. Here is a list of Chinese gold-mining
acquisitions over the last year:
Supply will get tighter. It's not because there's a lack of metal in the ground. It's
increasingly critical to ask whether any given deposit is economically viable,
politically feasible, and ecologically agreeable. Despite increased budgets on
exploration (last year the gold industry spent a record $8 billion) and despite a 570%+
increase in the gold price since 2001, discovery rates are still decreasing. It's clear that
the gold industry is unable to grow supply to a significant degree in spite of increased
spending and increasing margins.
x
Here's another way to look at how Fed action is driving gold: It's called the gold
coverage ratio.
It measures the amount of gold on deposit at the Fed against the total money supply.
"This ratio," writes Guggenheim Partners chief investment officer Scott Minerd,
"tends to move dramatically and falls during periods of disinflation or relative price
stability."
You might not think we're living in a period of "relative price stability", but we'll take
Mr. Minerd at face value: The gold coverage ratio is currently at an all-time low of
17%... yielding two tantalizing possibilities.
The historical average for the gold coverage ratio," Minerd writes, "is roughly 40%,
meaning that the current price of gold would have to more than double to reach the
average."
It gets better: "The gold coverage ratio has risen above 100% twice during 20th
century," most recently at gold's 1980 peak. "Were this to happen today, the value of
an ounce of gold would exceed $12,000."
At $1,767, it only makes sense to add to your current position. And our friends at the
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You can get started at this link. Note we may be compensated once you fund your
account, but we wouldn't alert you to this opportunity if we didn't stand behind it all
the way.
Since 1900, on average, velocity has turned over 1.69 times per annum.
So if money supply growth were, let’s say 5%, then on average, GDP would have
been 9.
(5 * 1.69)
In 1997, velocity peaked at around 2.12. It has now dropped to 1.57, which is the
lowest in 5 decades.
To my way of thinking, it is a confirmation that the productivity of our debt is either
non-productive or counterproductive. And that’s confirmed by these other
measures; mainly, the fact that the standard of living has not risen—the fact that the
employment-to-population ratio, which is the best of all of the employment measures,
is at a multi-decade low.
In other words, what you do is you try to find confirmation, not on the basis of one
single indicator, but on multiple indicators, and what they’re saying is that
we’re kind of on a downward spiral, and we’re not going to reverse it until we
reverse the policies. Good luck is not going to do it.
x
For example, when the Maastricht Treaty was signed in February 1992, one barrel of
crude oil cost $19.00, €15.95 (Dm 31.30) or 1.67 goldgrams. Now it costs $91.79,
€71.27 or 1.61 goldgrams, which makes clear that not only is gold useful in
communicating prices, it preserves purchasing power. Gold has been useful in these
ways for over 5,000 years, so it is logical to assume that gold will remain useful for
the foreseeable future.
Some say that the gold price rises and falls, but they are grabbing the wrong end of
the stick. It is the purchasing power of national currencies that rise and fall. Here is an
analogy to make this point clear. When standing in a boat and looking at the shore, it
is the boat (currencies) – and not the land (gold) – that is bobbing up and down.
Currency fluctuations occur in the short-term, but over the long-term, a currency’s
purchasing power is continually eroded from inflation and other debasements inflicted
on it, as is clear from the example above showing changes in the price of crude oil.
There is, however, a subtle but more important point to make here.
Gold does not create wealth. It cannot possibly do that because it does not generate
cash flow. Remember, gold is not an investment; it is money, and these two things are
entirely different. So when the price of gold rises, wealth is simply being transferred
from people who hold currency to people who hold gold. This wealth being
transferred already exists. It is wealth held in the form of purchasing power.
Lastly, is gold good value? This is a question that each of us must answer by ourselves
because value is subjective. But to me the answer is clear. Gold is indeed good value
because it is a useful money, not prone to the problems perennially plaguing national
currencies.
Further, gold is good value because it is not over-priced, a conclusion that can be
reached by simply considering supply and demand. Even though the gold price has
been rising this past decade, the supply of national currencies is being created much
faster than the supply of gold. Second, the demand for gold understandably continues
to rise as it offers a safe-haven from the ongoing turmoil of the interrelated bank
insolvency and sovereign debt crises that have been riling national currencies. These
crises have not ended, so I expect this supply/demand relationship will continue.
Therefore, gold will become more highly valued in the months ahead, meaning that its
purchasing power will rise.
At some point in the future, which cannot be predicted, gold will become overvalued.
Its purchasing power will exceed historical norms. To give but one possible example,
maybe a barrel of crude oil will only cost 0.50 goldgrams or less. When that moment
arrives, it will be time to reduce your gold holdings to buy undervalued investments
or to purchase some consumer goods with your savings, which is the gold you are
accumulating now while it remains undervalued. I suspect that we are still many
months, if not years, away from that event because gold is far from being overvalued.
x
In sussing out the future gold price, Dr. Shostak applies a proprietary model
incorporating U.S. monetary liquidity, economic activity in the United States and
China and the world supply of gold
x
The entire worldwide value of all gold exchange-traded products (ETPs) currently
represents just 2.1% of the cash and short-term investments held by S&P 500
corporations. If 20% of these companies decided to put a mere 5% of their available
holdings into these precious metals vehicles, their value would more than double.
If just 1% of the physical currency (M1) floating around the system were used to buy
gold Eagles, it would be 13 times more than the entire value of all coins purchased
last year.
If corporations chose to invest 1% of their cash in silver ETFs, it would surpass the
total current value of all such ETFs.
If corporations moved 5% of their “short-term investments” evenly into gold stocks,
the market cap of every gold company would increase by 20%.
If they chose silver stocks, they’d each grow by a factor of six.
Five percent of M1 would increase the market cap of gold producers by 14%. The
same fraction would be 3.4 times bigger than the entire current value of all primary
silver producers.
This is just S&P 500 corporations — there are many more corporations in the world,
as well as pension funds, hedge funds, sovereign wealth funds, mutual funds, private
equity funds, private wealth funds, insurance companies, and other ETFs.
x
However, one day this will change, interest rates will rise, and it will be time to sell.
Another indicator of a possible “time to sell” is when the Dow:Gold ratio (the number
of ounces of gold it takes to buy one share of the Dow) hits 4 or even overcorrects to
3 or 2 (today it is at 7.5—the Dow is at 12,422 and spot gold is 1658).
X
Here are a few interesting facts about hyperinflation that are not commonly known:
Hyperinflation, historically, only occurs in connection with fiat currencies.
The first case of hyperinflation, following the introduction of paper currency units,
occurred from 1789 to 1796, during the French Revolution.
All other cases of hyperinflation (27 of them, so far) have occurred since the
publication of Keynes' book and the adoption of his economic principles.
Five occurrences took place in the 1920s.
Four occurrences took place in the 1940s.
Eighteen occurrences took place in the 1980s - 1990s.
The occurrences took place in capitalist, socialist and communist countries. In Asia,
South America, Central America, Europe and Africa. They are therefore not
dependent upon a particular form of government or social structure. They happen
specifically as a result of a major creation of fiat currency units over a short time.
What of Europe and America?
So, is hyperinflation on the way for Europe and America? This may not be a certainty,
but it is quite possible and may be described as "likely."
At present, the US is not far from the inflationary level that has historically triggered
hyperinflation. If we consider this, we may resolve to keep an eye on the situation, so
that we are not taken by surprise. After all, hyperinflation is the economic equivalent
of a hurricane and is just as devastating a situation to be caught in.
The question, however, is whether "keeping an eye on the situation" will do the trick.
The trouble is, hyperinflation happens rather suddenly. In the 1920s, for example,
inflation had been on the rise for some time in Weimar Germany when it suddenly
took off, reaching 16,579,999%. In just a few months, the notes had become, literally,
worth less than the paper they were printed on, prompting Germans to use them as
kindling and wallpaper
x
It protects your wealth when paper money loses its value. It also protects your wealth
when paper money gains in value. It protects you when you are right...and when you
are wrong.
How so?
During the Great Depression, for example, the price of gold rose...against
dollars...even though the prices of food, clothing and other consumer items...as well
as the prices of investment assets...were falling in dollar terms. Why? Because money
gains value — relative to things — in a depression. Gold is money. It is the best
money. It is the only money that has stood the test of time.
Besides, there is more going on. In a financial crisis...or a depression...investors begin
to doubt that their counterparties will make good. Banks fail. Investors go broke. You
own a mortgage, and then you discover that the homeowner has left town...and the
house has lost half its value. You own a note, and then you discover than the payer is
bankrupt; your note is worthless. You own shares in a company; and then the
company goes out of business.
When you are in a de-leveraging phase, you discover that many of the assets of the
previous credit bubble are not assets at all. And while you’re waiting to find out, the
best thing to have in your safe is gold.
As uncertainty rises; so does the price of gold.
The price of gold also rises when the return on other assets declines. At 1.82%, the
real return on a 10-year T-note is negative. Consumer prices are rising faster. So, the
reward for lending to the government is less than zero.
Normally, holding gold costs you money. You give up the return you could get from
‘risk free’ investments (Treasury debt). Now, you give up the risk from reward-free
investments.
Gold goes nowhere. It produces no yield. It pays no dividends. It makes no profits.
You can’t live in it. You can’t drive it. You can’t hang it on your wall and admire it.
But when the return on Treasury debt is negative, what do you give up by owning
gold? You give up a loss!
You also give up the risk of a much bigger loss. The Fed is bound and determined to
bring up the inflation rate. Ben Bernanke has suggested that he might set the inflation
target higher than 2%. He has announced that he will keep the Fed’s key lending rate
near zero for the next 3 years. He has hinted that he is ready to print more money —
QEIII — if conditions warrant.
Holding gold protects you from Bernanke’s success. For if he succeeds in raising the
rate of inflation, gold will surely soar. And there is substantial risk — bordering on
certainty — that he will be no better at creating moderately more inflation than he has
been at creating moderately more GDP growth.
It is quite possible that he will overshoot.
Normally, inflation is a feature of the banking system. The system takes the Fed’s
monetary grubstake and parleys it into the nation’s money supply. Banks magnify the
money supply by lending...and thereby create more demand, which raises prices. They
do this by making loans...to people who then spend the money.
This sort of inflation is controllable, by raising interest rates and tightening banking
credit rules. But there’s another form of inflation. The kind that starts with an “h.”
Hyperinflation happens when the banking system breaks down. People lose faith in
the money itself...and the people who control it. Foreign dollar holders may worry
that the Fed is printing too much money. It may even be good economic news that
causes them distress; they may anticipate higher inflation rates, and a sell-off of the
dollar, which would lower the value of their dollar reserves. They may figure that they
are better off diversifying into yuan...or gold.
Then, when other investors and householders see the dollar falling...they get panicky
too. Pretty soon, people are digging around in drawers, bank accounts and
mattresses...looking for dollars — just so they can get rid of them.
That is when dollars hit the hyperinflationary fan. Our old friend Michael Checkan
tells what it was like in Argentina in the late ’80s:
“Imagine a $2.00 gallon of milk spiking to $775.40 within a year — like in Argentina,
1988.”
現金
cash
home
The yuan has cracked the top 10 of most traded currencies as ranked
by the Bank for International Settlements (BIS). No. 9, to be precise -up from No. 17 during the last survey, in 2010. Yuan trading volume
now equals $120 billion a day.
x
My greatest concern," says Sprott Asset Management's John Embry, "is
that the dollar at some point in the not-too-distant future may lose its
role as the reserve currency of the world."
Mr. Embry's interview with ETF Daily News comes at the same time as
we learn the greenback commands 62% of the $6 trillion in foreign
exchange reserves held by the world's central banks.
That's the lowest percentage in 15 years, reckons the International
Monetary Fund. All those "bilateral" currency agreements -- China and
Russia, Russia and Iran, China and Venezuela -- are adding up to death
by a thousand cuts.
"I think," says Mr. Embry, citing two factors at work, "the U.S. has not
lived up to their responsibilities as the providers of the reserve currency
because of their financial profligacy.
"But more importantly, the Chinese are conducting themselves in such
a way that I suspect they would love to serve that role, and what
they're doing right now is they're cutting deals with all the other
countries in the world in which the dollar is being knocked out of the
transaction, so the demand for dollars will drop.
"So I see this as a very problematic time for the U.S. dollar, and if I'm
right, the implications for interest rates are not positive. I mean interest
rates are far too low and they're being maintained at those levels
because of the excess debt in the system, but I think that has a limited
shelf life and I think higher interest rates are ultimately going to be
another problem for the U.S. economy."
x
Canadian papers and real estate brokers will debate the issue of whether or not there’s
a bubble until they’re blue in the face.
But anyone with any kind of objectivity can see there’s a problem there. House prices
have risen by 123% since January 2000. Even at the peak, US prices were only 90%
higher than they were in 2000 – and in real terms, US prices are now slightly lower
than they were back then.
According to the Royal Bank of Canada, the average bungalow goes for roughly six
times household income. This rises to seven times household income for two-storey
houses. According to the Halifax, the comparable ratio for London houses is only 5.6
times earnings – and that’s high by historic standards.
Meanwhile, The Economist estimates that the ratio of rent-to-prices in Canada is 78%
higher than its long-term average. This is more extreme than any other major property
market in the world – even Hong Kong is only 68% above its long-term average.
So Canadian prices are in a bubble, no question about it. And now the bubble might
be popping.
x
A friend asked if the US will tighten up money supply to stem runaway inflation, like
what Paul Volcker did in 1981 and killed the gold bull market. That will not happen
because:
Then, the US was still a creditor to the rest of the world, not a debtor.
Then, the US was still running positive trade balances, not losing money every month.
Then, US households had debt of only 60% or 70% of their disposable income, not
120% like today.
Then, the Fed was determined to stifle inflation; now it is determined to cause it.
Then, the federal government’s debt was less than 40% of GDP. Now, it’s over 100%.
Then, even in today’s inflation adjusted terms, the US government ran a deficit of
$197 billion. Today, the deficit is $1.1 trillion.
Then, stocks had been going down for the previous 14 years; bonds had been going
down for at least 31 years. Now, stocks and bonds have been going up, generally, for
the last 30 years.
This final point is now just a detail. It’s the heart of the matter. With bonds at a
30-year low, Paul Volcker could squeeze inflation...begin a 3-decade period of rising
bonds (with falling interest rates)...and an 18-year bust in the gold market.
沉思錄
"An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of
forcing anything into an empty head."
"It has often been said that power corrupts. But it is perhaps equally important to realize
that weakness, too, corrupts. Power corrupts the few, while weakness corrupts the
many. Hatred, malice, rudeness, intolerance, and suspicion are the faults of weakness.
The resentment of the weak does not spring from any injustice done to them but from
their sense of inadequacy and impotence. We cannot win the weak by sharing our
wealth with them. They feel our generosity as oppression."
"The impression somehow prevails that the true believer, particularly the religious
individual, is a humble person. The truth is the surrendering and humbling of the self
breed pride and arrogance. The true believer is apt to see himself as one of the chosen,
the salt of the earth, the light of the world, a prince disguised in meekness, who is
destined to inherit the earth and the kingdom of heaven too. He who is not of his faith is
evil; he who will not listen will perish."
"Those who lack the capacity to achieve much in an atmosphere of freedom will clamor
for power."
"Every great cause begins as a movement, becomes a business, and turns into a racket.
Steven Wright:
1 - I'd kill for a Nobel Peace Prize.
2 - Borrow money from pessimists - they don't expect it back.
3 - Half the people you know are below average.
4 - 99% of lawyers give the rest a bad name.
6 - A conscience is what hurts when all your other parts feel so good.
7 - A clear conscience is usually the sign of a bad memory.
8 - If you want the rainbow, you got to put up with the rain.
10 - The early bird may get the worm, but the second mouse gets the cheese.
11 - I almost had a psychic girlfriend... but she left me before we met.
12 - OK, so what's the speed of dark?
13 - How do you tell when you're out of invisible ink?
14 - If everything seems to be going well, you have obviously overlooked something.
15 - Depression is merely anger without enthusiasm.
16 - When everything is coming your way, you're in the wrong lane.
17 - Ambition is a poor excuse for not having enough sense to be lazy.
18 - Hard work pays off in the future; laziness pays off now.
21 - Eagles may soar, but weasels don't get sucked into jet engines.
22 - What happens if you get scared half to death twice?
24 - Why do psychics have to ask you for your name?
25 - If at first you don't succeed, destroy all evidence that you tried.
26 - A conclusion is the place where you got tired of thinking.
28 - The hardness of the butter is proportional to the softness of the bread.
29 - To steal ideas from one person is plagiarism; to steal from many is research.
30 - The problem with the gene pool is that there is no lifeguard.
31 - The sooner you fall behind, the more time you'll have to catch up.
32 - The colder the x-ray table, the more of your body is required to be on it.
33 - Everyone has a photographic memory; some just don't have film.
34 - If at first you don't succeed, skydiving is not for you.
And the all-time favorite 35 - If your car could travel at the speed of light, would your headlights work?
“I have seen none who do not have more desires than real needs and more needs than
satisfactions.” — Voltaire
Government creditors aren't snubbed, they're slowly asphyxiated.
Since light travels faster than sound, some people appear bright until you hear them
speak.
Make the best use of what is in your power, and take the rest as it happens.
[On ancient Athens]: "In the end, more than freedom,
they wanted security. They wanted a comfortable life,
and they lost it all – security, comfort, and freedom.
When the Athenians finally wanted not to give to society but
for society to give to them, when the freedom they wished for
most was freedom from responsibility, then Athens
ceased to be free and was never free again."
~ Edward Gibbon was an English historian and Member of Parliament.
His most important work, The History of the Decline and Fall of the Roman Empire,
was published in six volumes between 1776 and 1788. The History is known
principally
for the quality and irony of its prose, its use of primary sources, and its open
denigration of
organized religion, though the extent of this is disputed by some critics (Wikipedia)
expect a continued rise in socialism at the expense of the shrinking population of the
productive.
Bear markets are for buying and bull markets are for selling. Rick Rule says, in these
markets, you're either a contrarian or a victim.
“What the wise man does in the beginning, the fool does in the end.”
The inherent vice of capitalism is the unequal sharing of the blessings. The inherent
blessing of socialism is the equal sharing of misery." ~ Winston Churchil
Help someone when they are in trouble, and they will remember you when they're in trouble again.
You have more people that vote for a living than work for a living.
Milton Friedman once quipped that there was nothing as permanent as a temporary
government program. I think James Montier would call it overconfidence about future
self-control.
"The average man doesn't want to be free. He simply wants to be safe."
– H.L. Mencken, Notes on Democracy (1926)
陳清白因早年以旋風式大手買入新盤單位，而有「白旋風」的別名，他
接受本報專訪時表示，每樣事物都「物極必反」，樓市亦然。他認為，
本港樓價早已高得不合理，與市民購買力脫節，「一個居屋單位竟然要
500 萬元，你會不會用 2 萬元食大牌檔？買嘢都需要講求合不合理吧」。
"Beware of false prophets, who come to you in sheep's clothing, but inwardly they are
ravenous wolves. You will know them by their fruits. Do men gather grapes from
thorn bushes or figs from thistles? … Therefore by their fruits you will know them."
Matthew 7:15-20
"Rock-solid understanding is the foundation for success."
"Every mistake is a teacher and holds a lesson. "
"Deliberately exaggerating or considering extreme, impractical
scenarios often frees us to have an unforeseen insight. "
"business, you could ask what you would do if there were no budgetary
constraints whatsoever. Maybe some aspects of those unrealistic
solutions will point the way toward a practical solution that you
otherwise would never have even considered."
"Some artistic movements—such as minimalism—were iconic
examples of artists’ exaggerating a feature to extremes. Some viewers
might look upon the results as mistakes, although the artists might
view the results as plumbing the depths of artistic expression. Either
way, exploring extremes is illuminating. An effective strategy for
gaining insight is to exaggerate conditions either through a physical or
a thought experiment."
"A ship in port is safe, but that’s not what ships are built for.
—Admiral Grace Murray Hopper"
一笑會
"I was going to start off tonight with an Obama joke, but I don't want
to get audited by the IRS."
On NSA surveillance: "We wanted a president who listens to all
Americans – now we have one."
On a new IRS commissioner: "He's called 'acting commissioner'
because he has to act like the scandal doesn't involve the White
House."
We thought, briefly, about putting in a call to the National Security
Agency.
"Hello, we're hoping you can help us. Our email account stopped
working. We're afraid we may have missed something. And we know
you fellas make a habit of recording every communication, whether it is
any of your business or not. So would you mind sending our email from
yesterday to another address?"
x
The government is like a condom in that it allows for inflation, halts
production, destroys subsequent generations, protects a bunch of
pricks, and provides its constituents with a sense of security while they
are actually being screwed.
x
國內的乘數表跟往年不一樣，六三一十八之後，便跳接至六五終三十
，中間少了一欄，莫讓盛世傷懷。
x
Toxic Debt Scare
Finally, while researching this letter I came across the following post written by Colm
McCarthy. I find it hilarious (by the standards of economics humor), and I hereby pass
a few paragraphs along for your enjoyment. (For the young and those for whom
English is a second language, a “knacker” is a person engaged in the trade of
rendering animals that have died on farms and are unfit for human consumption.)
Teams of economists have detected traces of bank-debt DNA in samples of Irish
sovereign debt in portfolios all over Europe. Genuine Irish sovereign debt is believed
safe for humans but bank debt is toxic. The economists believe that as much as 30%
of all Irish sovereign debt is not genuine. The source of the contamination appears to
be a premises in Frankfurt, Germany. The contamination dates from 2010, when a
sovereign debt knackering plant was run from the premises by a Monsieur Trichet, a
French national. It is alleged that he gathered up large quantities of toxic bank debt
and mixed it up with genuine sovereign debt in the middle of the night, when nobody
was looking.
There is no licensing or supervision of sovereign debt knackerers at European level
and it is understood that the Frankfurt plant was staffed by people with no previous
experience in the trade. Genuine debt from several other European countries was
processed through the Frankfurt plant in 2010 and 2011 and may also have been
infected. The plant, which claims to be the only sovereign debt processing facility in
Europe, is now run by a Signor Draghi, an Italian. Monsieur Trichet has retired from
sovereign debt knackering and has commenced a new career in the aviation business.
The Irish Department of Finance has been seeking to return the infected sovereign
debt to the Frankfurt plant with a view to removing the toxic component. They are
afraid that retailers might remove the sovereign debt from their shelves. Signor
Draghi has promised to do his best, but one of his assistants, Herr Weidmann, a
German, believes that the toxic bank debt is harmless, and that anyway nobody will
notice. He is refusing to operate the decontamination equipment.
x
The following questions were set in past GED examinations.
These are actual answers (from 16-year-olds)... and they WILL breed.
Q. Name the four seasons.
A. Salt, pepper, mustard and vinegar.
Q. Explain one of the processes by which water can be made safe to drink.
A. Flirtation makes water safe to drink because it removes large pollutants like grit,
sand, dead sheep and canoeists.
Q. How is dew formed?
A. The sun shines down on the leaves and makes them perspire.
Q. In a democratic society, how important are elections?
A. Very important. Sex can only happen when a male gets an election.
Q. What are steroids?
A. Things for keeping carpets still on the stairs. (Shoot yourself now, there is little
hope.)
Q. What happens to your body as you age?
A. When you get old, so do your bowels and you get intercontinental.
Q. What happens to a boy when he reaches puberty?
A. He says goodbye to his boyhood and looks forward to his adultery.
Q. What is artificial insemination?
A. When the farmer does it to the bull instead of the cow.
Q. How are the main 20 parts of the body categorized (e.g., the abdomen)?
A. The body is consisted into 3 parts – the brainium, the borax and the abdominal
cavity. The brainium contains the brain, the borax contains the heart and lungs, and
the abdominal cavity contains the five bowels: A, E, I,O,U. (Up all night smoking
weed.)
Q. What is the fibula?
A. A small lie.
Q. What does "varicose" mean?
A. Nearby.
Q. What is the most common form of birth control?
A. Most people prevent contraception by wearing a condominium. (That would
work.)
Q. Give the meaning of the term "Caesarean section."
A. The Caesarean section is a district in Rome.
Q. What is a seizure?
A. A Roman Emperor. (Julius Seizure, I came, I saw, I had a fit.)
Q. What is a terminal illness?
A. When you are sick at the airport. (Irrefutable.)
Q. Give an example of a fungus. What is a characteristic feature?
A. Mushrooms. They always grow in damp places and they look like umbrellas.
Q. Use the word "judicious" in a sentence to show you understand its meaning.
A. Hands that judicious can be soft as your face. (OMG)
Q. What does the word "benign" mean?
A. Benign is what you will be after you be eight. (Brilliant)
Q. What is a turbine?
A. Something an Arab or Shreik wears on his head.
when someone tries to ands me a flyer, it's kinda like he is saying "here, you throw this
away.
These sentences actually appeared in church bulletins or were announced in church
services:
The Fasting & Prayer Conference includes meals.
The sermon this morning: "Jesus Walks on the Water." The sermon tonight:
"Searching for Jesus."
Ladies, don't forget the rummage sale. It's a chance to get rid of those things not worth
keeping around the house. Bring your husbands.
Don't let worry kill you off – let the Church help.
At the evening service tonight, the sermon topic will be "What Is Hell?" Come early
and listen to our choir practice.
The eighth-graders will be presenting Shakespeare's Hamlet in the Church basement
Friday at 7 PM. The congregation is invited to attend this tragedy.
MURPHY'S OTHER 15 LAWS
1. Light travels faster than sound. This is why some people appear bright until you
hear them speak.
2. A fine is a tax for doing wrong. A tax is a fine for doing well.
5. Change is inevitable, except from a vending machine.
12. Give a man a fish and he will eat for a day. Teach a man to fish and he will sit in a
boat all day drinking beer.
13. Flashlight: A case for holding dead batteries.
15. When you go into court, you are putting yourself in the hands of twelve people
who weren't smart enough to get out of jury duty.