goldmap

Europe on the Brink - 8/18/11

 

"[A]ll the gold bugs who say gold is going to $1,500, $2,000, they're just speaking nonsense...I don't believe in gold." -- Nouriel Roubini, professor of economics, NYU's Stern School of Business, 12/10/09

 

 

 

Dear All,

 

 

From my last post: "[Europe] is as critical a catalyst for a systemic steamroll as anything since the Lehman collapse....Europe is where my eyes are." Word last night that a major European bank was illiquid to the tune of $500 million and which sum it had to borrow from the European Central Bank sent equity markets (yet again) into apoplexy. The reaction was wholly warranted. The ECB does not have the balance sheet to similarly support other major banks and if confidence slips further even marginally from here Europe could be easily pushed to a banking holiday. European banks it should be said -- should the worst materialize, would not collapse in a vacuum. It may be their continent, to paraphrase John Connally, but it is our problem.

 

 

As of Dec. 31 the The U.S. Federal Reserve employed 17,398 people earning an average salary of $87,578 -- an annual payroll approaching $1.5 billion. From its profligate administrative budget it maintains among other things, a full-time curator who oversees its art collection and reportedly, a fleet of some 40 aircraft. It was therefore met with a bit of skepticism when in March 2006 the Fed announced that in order to save money it would cease reporting M3, the broadest measure of the U.S. money supply:

 

"M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."

 

A number of observers found it suspicious the Fed had suddenly become cost-conscious, particularly as it pertained to the rather minuscule expense of providing this quite basic and traditional public disclosure. And this portion in the official statement -- "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2..." made no sense. M3 clearly does convey additional information not embodied in M2. Uniquely, M3 includes large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and of particular note, Eurodollars. Furthermore, if redundancy actually was the issue why not eliminate M1 or M2 -- the narrower of the measures?

 

The Fed's deprivation of financial markets of the broadest measure of the dollar money supply is noted because it has facilitated among other things, the Fed's increasingly secretive activities as Europe's shadow/ de facto central bank. Never has the cessation of M3 reporting proved so convenient to the Fed as at this moment when the European banking system and the Monetary Union's central bank are in dire need of liquidity.

 

 

I offer no theory as to why one major rating agency has suddenly found religion and is offering honest assessment of U.S sovereign credit risk. I can only applaud it (Although one should remain skeptical whenever a house of prostitution converts to a child day-care facility). From S&P this week:  "The markets' violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default."

 

 

This is only the start: 8/17/11 - Consumer Prices Rise More Than Forecast

 

 

The Bureau of Labor Statistics now serves as this county's economic propaganda ministry. Shadowstats is the most credible provider of key U.S. economic statistics. Here are their updated key stats:

 

Consumer Price Index: (7/15/11) 11.3% annualized (contrasted with the "official" BLS rate of 3.56%) Unemployment: (8/15/11) 22.7% (contrasted with the "official" BLS rate of 9.1%)

 

 

Dylan Ratigan is absolutely correct but misses one important fact. The U.S. president is as bought and owned as Congress: Dylan Ratigan rant

 

 

It seems the lead climate-evangelist is losing it. You'll note that he consistently refuses to come off the pulpit to debate those he refers to as "pseudo-scientists." It's always easier and safer to demean the opposition from a distance: TheHill: Gore: Climate skeptics are peddling ‘bullsh*t’

Climatgate: Point-By-Point Rebuttal to Gore's Highbrow Scientific Arguments

 

 

Lexapro Alert... RollingStone: Is the SEC Covering Up Wall Street Crimes? "A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals"

 

 

Many Americans still cannot contemplate that the type of rioting seen in Britain could happen in the U.S. Note to the naive: it already is. Widely under-reported, mobs have been rampaging in major cities including Los Angeles, Chicago, Cleveland, Washington, D.C., and Milwaukee. Philadelphia is actually under curfew. With 15% of the U.S. population now on food stamps and half of black teens unemployed, why would anyone expect otherwise?

 

 

The trend...

 

Reuters: Rush to gold shakes up staid French market

 

CNN: Booming business of fear: Sales of safes soar

 

Reuters: As gold prices surge, cash-for-gold frenzy fades

 

 

On to gold...

 

It is difficult to know precisely what is at play here but it represents a potentially explosive dynamic in the paper/physical gold war: Bloomberg: Chavez Orders $11 Billion of Gold Home. Chavez's move to nationalize Venezuela's gold mining industry is a non-event however if he in fact demands a physical repatriation of the nation's bullion it will create serious anxiety for the western central banks and bullion banks, who are operating a fractional gold reserve scheme. Their gold is pledged at least 25:1 and only a modest demand for delivery would send the gold price soaring, particularly if it encourages others to demand their custodial physical.

 

Wall Street has suddenly produced a plethora of "experts" to es-plane to financial audiences what gold is, why it is rising, what it is worth, and that it cannot be eaten. The commentary is with few exceptions, inane. Most of these folks are the very same perma-stock-bulls who have populated CNBC and the like since NASDAQ 5000. One of the more consistent observations: "You can't eat it...it has no real value." I heard an economist say the following regarding the gold price: "I don't know what it's worth and frankly, nobody really does." Oh really, Mister Economist?...nobody? We heard similar things from them about the financial collapse: "Nobody could have predicted it!" On Thursday one of the CNBC on-air hotshots admitted he'd "been wrong about gold" but added, "still the problem with gold continues to be assessing its value"

 

How lazy and how ignorant. There are actually numerous metrics with which a measure of the dollar value of gold can be estimated. The fact that the price continues to remain artificially depressed and that central bank stated bullion reserves are largely fictional makes the under-pricing even more compelling, but it would be unrealistic to expect a CNBC dolt to grasp, let alone discuss this. Quite a paradox it is that these same talking heads lack no certainty or conviction about the value or digestibility of the paper bills they carry around in their wallets. Apparently too, they make delicious snacks.

 

You are seeing the beginning of what has been anticipated here -- investors turning to gold as the ultimate repository of flight from a broken financial system. UBS last week noted the movement from paper to physical gold -- particularly in Europe -- in the face of risk aversion. All of the reasons for these moves are documented in these blog archives. In spite of the recent action, gold and silver are too cheap. There will be short term price corrections but the trend is sharply higher for the next several years. Little noticed is that the gold price has now caught that of platinum's. For speculation, gold and silver stocks are as qualitatively inexpensive as at any time in the entire decade long bull market; I have no doubt that the goldmap index will trade at many multiples of its current level. If you have cash, the prices of the shares of quality gold and silver companies should make you giddy with joy.

 

Buy them with abandon.

 

 

My best,

 

 

Jeff

 

 

High Anxiety - 8/7/11

 

“The stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the longer term it acts like a weighing machine.” -- Benjamin Graham, the father of value-investing

 

Dear All,

I'm departing from my customary routine of posting every couple of weeks by putting out this third post in as many days because so much is occurring and I'm receiving a substantial amount of email.  The financial world is on edge.  There is much anxiety.

The market action the past several days reflects the fragility of confidence on several fronts.  The debt-ceiling fiasco and leak of the impending post-market close S&P downgrade (by which the usual suspects scored their customary cache) may have been the triggers but please pay attention to the European sovereign trauma.  It is as critical a catalyst for a systemic steamroll as anything since the Lehman collapse.  Spain and Italy are not like the smaller PIIGS -- together their economies and external debt levels are four times the combined size of Greece and Portugal's. How much Germany can and is willing to continue to bear on behalf of the weak members is a big question and the balance sheet of the ECB itself is a joke.  In any event, Jim Rickards correctly observed recently that the dominance Germany failed to achieve in the Second World War is occurring before your eyes as a 'Rise of the Fourth Reich.'  Talking heads and Wall Street mouthpieces are all over the media spinning what the S&P downgrade means -- but Europe is where my eyes are. 

As to the S&P downgrade -- it is a formality by which one of the three already thoroughly discredited major rating agencies merely confirmed the obvious and what the markets already know.  These are the same folks who were bought off by Wall Street and stamped garbage structured products as AAA.  The fact that they make $2 trillion addition errors should surprise no one.  The bigger surprise was to learn that they actually do any addition at these rating agencies in the first place.  The U.S. raters are politicized houses of prostitution and why this particular one uncharacteristically chose in this instance to act appropriately is anyone's guess.

There were brutal comments from China yesterday regarding the S&P downgrade.  Through an editorial in its official news agency Xinhaunet, China chastised the U.S.  It minced no words:   

"Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth...

The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone....

International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country...

A little self-discipline would not be too uncomfortable for the United States, the world's largest economy and issuer of international reserve currency, to bear...

For centuries, it was the exuberant energy and innovation that has sustained America's role in the world and maintained investors' confidence in dollar assets. But now, mounting debts and ridiculous political wrestling in Washington have damaged America's image abroad...

All Americans, both beltway politicians and those on Main Street, have to do some serious soul-searching to bring their country back from a potential financial abyss."

Then there was this today from Dagong, now the world's most credible international rating agency: CNBC: Dollar to Be 'Discarded' by World: China Rating Agency

 

This blog was established in May 2009 following email blasts I had previously been providing to friends. In the first posting on this blog in May 2009 I wrote the following:

"Very few understand what we are in the midst of.  I pity those who are not protecting themselves with gold and silver because they are unprepared to deal with what will shortly hit us."

If you review the blog archives you will observe that the focus here has consistently been on the big trend with three major themes:

1. The state of the financial system was much worse than you were being told and the majority on Wall Street understood.

2. The value of the U.S. dollar would deteriorate over the next several years accompanied by unprecedented inflation (At the commencement of the blog the US dollar index was at 84.)

3.  The prices of gold and silver would increase dramatically (At the  commencement of the blog, gold and silver were trading at $910. and 13.40 per ounce respectively).

This trend has played out like a script and the themes have not changed one bit although perhaps some in the financial press and on Wall Street have caught on - but not many.  We remain closer still to the beginning of the trend than the end insofar as the ultimate levels of both the dollar and precious metals.

As a reader you also know that I do not concern myself with short-term price action, which more often than not obscures the ability to see what is on the road ahead.  Though gold, silver and precious metal stocks have proven wonderful investments over this past decade, it has not necessarily always been easy to remain steadfast. There can be periods where value and price dramatically diverge. To wit,

* Having decided in late 1997 that silver and gold prices were ridiculously cheap and represented superb value, I invested my entire life savings in small and medium size gold and silver companies. From 1998 through 2001 however, the prices of gold and silver did not budge. Gold and silver averaged $280 and $5 per ounce respectively for these years and the goldmap index treaded water at around 1.0, at times trading below that.  In the interim the NASDAQ was on its way to 5000 and the entire world of finance ridiculed gold as a loser's game, which is precisely what for some 20 years it continued to be.   None of this made any sense to me. I did believe however that gold and silver's value would ultimately be more accurately reflected by price, and to a degree that would justify the time it would take.  

It was and it did.  In hindsight it seems obvious.  Living through it however was not easy.

*In the fall 2008 stock market sell-off following the Lehman collapse the goldmap index lost 2/3 of its value, dropping from 13.5 to 4.5 in a matter of weeks. The fall exceeded that of the broader stock indexes.  This occurred in the face of the gold price having fallen only modestly relative to the broad selloff through all asset classes.  The Index subsequently rebounded at a rate far exceeding the broader market. It currently sits at 18.4. 

I relate the foregoing because we are currently in such a period with respect to the precious metals and the precious metal stocks, where the price and value of the stocks relative to the metals have diverged to an extreme. Fundamentally, when the "above-ground" price of gold or silver rises, the value of gold and silver below-ground rises as well. In fact the values of entities that own economic below-ground 'proven and probable' gold and silver reserves actually increase at an accelerating rate to the increase in the above-ground price due to the economic leverage inherent in their operations. It matters not at all if the entity is engaged in active mining operations -- the in-ground assets become exponentially more valuable.  In spite of this, the prices of shares of public precious metal equities have actually been declining lately in the face of rising and record gold and silver prices. 

Nature does not permit such anomalies to persist indefinately. This dichotomy between price and value should be taken as an opportunity to deploy cash to the precious metal mining sector. Nothing assures that the price of these stocks won't become even cheaper after you buy them and before prices revert to their intrinsic value -- markets can do anything in the short or intermediate term.  I can tell you though that I am personally 100% capital committed at this time to the precious metal equity sector and am fully prepared and accepting of the possibility of even lower prices before I am rewarded.

As we approach the coming week tune out all talk of gold and silver being in a bubble. They are the farthest things from a bubble as could be, displaying none of the symptoms of over-speculation such as wide public ownership or untenable price trajectories . The closest thing to a bubble is the U.S. dollar and all things it envelopes, particularly the prices of U.S. Treasuries. 

Expect considerable volatility in the markets. Increasingly you will see that gold and silver are the only real places of safety amidst the turbulence. The public is starting to learn this.

Fasten your seatbelt.

 

All the best,

Jeff

BULLETIN: Mean Reversion 8/5/11

 

 

Dear All,

 

A number of you are confused by the behavior of the silver and gold shares; frustrated by their lack of performance in the face of gold setting new highs and silver trading 20% below recent new 30-year highs.

 

In yesterday's post I made reference to the concept of mean reversion with respect to the relationship between the shares and the metals. The only reason to own the shares is for their potential to outperform the returns of the metals themselves. In all previous precious metals bull markets the share indexes outperformed and they are doing so in this one as well.  As evidenced by the GOI (goldmap out- performance Index) the shares of the goldmap Index have cumulatively -- since the Index' inception in 1997 -- outperformed the metals by a factor of 3.2.  At its highest level of out-performance (2007) the goldmap Index exceeded the returns in gold and silver by a factor of 12. These represent both extremes of GOI readings.

 

The correlation however can fail to exist over short or intermediate periods. That has been the case for example for 2011 year-to-date.  There are a number of potential explanations for this such as extensive shorting of the shares by funds, which are hedged/long the metals. For an extended period now this trade has been highly profitable for the funds, which operate as a herd. The nature of these fund trades is they simply continue until they no longer work. When it finally goes against them it will unwind with a fury.  The shares will be bid and the momentum will shift their way in an accelerating manner. 

 

The larger point is to be cognizant of when values or trades become stretched to extremes. Take comfort in history and the laws of nature such as mean reversion.  This requires the triumph of intellect over emotion.

 

Jeff

 

 

Phony deals and 'the tradition' - 8/4/11

 

"...[T]he whole world to me is on the verge of a final scramble to lock up hard assets as part of a flight out of paper money...Mark my words, if you don’t own gold you will rue the day you decided not to buy it.” -  James Dines 7/8/11

 

Dear All,

If after this most recent display of U.S. political/fiscal stewardship, S&P and Moody's fail to downgrade U.S. debt then Dagong will become the only credible international credit rating agency: Xinhuanet: Chinese agency downgrades US credit rating

The debt-ceiling budget plan is merely a back-ended placebo scheme of phased-in pretend spending reductions against considerably larger spending increases.  While the debt ceiling is being raised by $2.4 trillion, less than $19 billion in spending cuts (under 0.8% of the debt ceiling increase) will take effect prior to the November 2012 presidential election. That's really all you need to know as the remainder of the plan is entirely bullshit. There are no net spending cuts or debt reductions under the plan. $2.4 trillion will be spent today while $917 billion in spending "reductions" will be phased in over a decade against an additional $10 trillion of new spending (and by which point such "cuts" will further prove utterly meaningless relative to future debt levels and multiple ceiling increases that will surely come) while the other $1.5 trillion of reductions are only "perhaps/maybe."   Notwithstanding the gyrations of the past few months, under this plan net spending will continue upward at an accelerating rate.  The manner in which this country has thus-far accumulated $14.3 trillion in debt (exclusive of entitlements) can be gleaned from precisely the perverse process by which this latest "debt deal" -- under which the U.S. has raised the ceiling by another $2.4 trillion -- was hammered out.  And so the story goes. 

Debasement is the covert manner by which modern nations default on their debt.  What has been most striking in observing the Republicrat debt ceiling/default posturing is the plethora of observers who have mistaken its relevance. The process of U.S. debt default has actually been well underway for some time and is accelerating.  The arm-wrestling has been a charade diverting the country's attention away from its thoroughly irresolvable structural financial position, as debasement of its currency persists. Here is an updated chart of the U.S. adjusted monetary base. Note that QE2, despite having officially ended in June, did not stop the base's expansion. Following a brief respite at that time it has set another record: 

It has been curious to read commentary that the U.S. has never defaulted on its debt and that such an event --  had it occurred -- would have been unprecedented.  The following are prior overt occurrences of default by the U.S. on its debt obligations.  Ron Paul is the only public official to have recently taken note of this:

January 30, 1934:    Through passage of The Gold Reserve Act, the U.S. reneges on its promise to pay holders of U.S. gold certificates the gold they are entitled to pursuant to the certificate legend: "This certifies that there have been deposited in the Treasury of the United States of America (number) Dollar(s) in gold coin payable to the bearer on demand"   The Act requires that all gold certificates be surrendered.  Additionally, The Gold Reserve Act outlaws the private possession of gold, forcing individuals to sell their gold to the Treasury at the "official price" of $20.67 per ounce.  The Treasury subsequently "revalues" gold to $35 per ounce.

June 24, 1968: The U.S. reneges on its promise to pay holders of U.S. silver certificates the silver they are entitled to pursuant to the certificate legend:  "This certifies that there is on deposit in the Treasury of the United States of America (number) dollar(s) in silver payable to the bearer on demand."

August 15, 1971:   President Nixon closes the "gold window" by which foreign governments are permitted to exchange their dollars for gold.  Nixon blames "international speculators" for the necessity to do so.   

 

While the quantitative unemployment statistic is widely reported there is far less attention paid to the qualitative story behind the nation's chronic unemployment misery:

 

Charts: Courtesy Zerohedge

 

 

ISDA ("The International Swaps and Derivatives Association") is owned by the major international banks and writers of OTC derivatives.  Here you see the OTC derivative fraud at work. ISDA refuses to declare the Greek bond default a "default."  To do so would trigger massive credit default swap payment obligations by U.S banks and systemic threat.  Never mind that under the arrangement, holders of Greek debt are as a practical matter given no choice but to "voluntarily" accept  an exchange for new securities worth far less than the original debt -- a default is only a default when the ISDA says so.  Kafka would blush. MSNBC: Bank plan for Greece won't cause CDS payout: ISDA

 

The folks who conjure up the entirely fictional Consumer Price Index at The Bureau of Labor Statistics are a creative bunch.  As Grant's Interest Rate Observer points out in its July 15th issue, The Wall Street Journal, citing data from Reis Inc. reported last month that residential rents increased 2.4% in the second quarter.  The BLS meanwhile reported that the "Owner's Equivalent Rent" component of CPI (the price an owner's house would fetch in the rental market) rose by only 0.9%. 

 

Noteworthy coming from a Treasury Secretary but nontheless, an understatement: "[I]t's a very tough economy....it's going to feel very hard, harder than anything they've experienced in their lifetime now, for a long time to come."

 

Traveling in China last month, the national celebration commemorating the 90th anniversary of the Chinese Communist Party's founding was observable in the major cities, particularly in Beijing where a celebratory film entitled 'The Founding of a Party', plays continually in Tiananmen Square.  I found this piece of reporting on the commemoration by Der Spiegel quite interesting:  'The high point of the Communist Party's culture festival is an elaborately produced movie called "The Founding of a Party," which was financed in large part by General Motors.'

 

This is what the United States has to show for its support for the replacement of a secular dictatorship by means of "the democratic process."  This is not to suggest that its prior alliance with the ousted Mubarak regime was necessarily wholesome -- only that U.S. foreign policy is so dopey that one has to wonder if it is goal oriented or simply impromptu and reactionary whenever a crisis develops.  The U.S. abandoned an ally in which it had invested hundreds of $billions over successive decades and which, notwithstanding the always attendant regime corruption, ran a reasonably functioning secular dictatorship providing relatively decent infrastructure and a balance to the radicalized Islamic regimes in that part of the world. The winner in its removal is Islamic fundamentalism.   NYTimes: Islamists Flood Square in Cairo in Show of Strength

One therefore has to wonder what precisely the 'War on Terror" is.  While TSA employees screen barefoot air travelers -- confiscating shampoo and toothpaste, the White House and State Department support the overthrow of regimes which result in the release of imprisoned Islamic extremists. One also must wonder what our goals are in Iraq, Afghanistan, and Libya when under the best of circumstances, the type of regimes that might one day appear in these countries are precisely the type whose fall the U.S. supported in Egypt.  American style democracy is not in the cards in that part of the world (Arguably, It is barely functioning in the U.S.).  Kids are losing lives in wars that make no sense and many are there only because they can't find jobs at home.

 

The trend...

FT: China and Iran plan oil barter system  The new Iranian Oil Bourse will circumvent the U.S. dollar as a medium of exchange.

hindustanTimes: Inflation to remain elevated  This only adds to India's already robust gold appetite.

Turkey Bank Cancels Dollar Buying

Korean central bank makes first gold purchase in 13 years

Bloomberg: Yu Yongding Says China Needs to Hold Less Treasuries  “U.S. bonds are not safe, but people think they are safe. That is a mirage"

 

Misc....Forbes: New NASA Data Blow Gaping Hole In Global Warming Alarm-ism

 

Gold and silver...

When a central banker, no less the Chairman of the U.S. Federal Reserve pronounces that gold is not money, it is attention worthy. NYSun: Bernanke - "Gold Isn't Money"   Not that demonetization of the barbarous relic is ever surprising from these quarters -- gold is after all the natural enemy of a central bank. This particular banker however chose to express his disdain for the single monetary instrument to which he is ultimately accountable and which cannot be maneuvered (other than in short-term operations) in the most desperate manner -- by denying that it is money in the first place. Gold is of course the only real money in that it is not simultaneously someone's liability, and it has been so for at least 5,000 years.  The Chairman though, testifying before the House, was pained to state under questioning that he prefers to think of gold not as money but as 'a tradition.'  OK, Mr. Chairman, we'll allow your semantic indulgance and simply point out that whereas no paper currency in history has survived more than 200 years, the very same fistful of gold that was used to trade for goods and services three millennium before Jesus' time on earth still serves in that tradition today.

Reporting that it holds  €83,939 million of “Gold and Gold Receivables," the Bundesbank lumps together paper and gold into one line item -- typical of western central bank obfuscation of their gold holdings. James Turk: Germany’s gold: It’s time for an accurate accounting

The goldmap index and the GOI are at 20.2 and 3.37 respectively. The stocks remain anemic relative to the metals. This relationship will revert to the mean.  The timing will prove of little consequence -- the returns will be that large.  The relationship is so out of whack that the Index could theoretically double without any upward move in the price of either silver or gold -- yet the GOI would be mid-range of the historic norm.

Look for volatility and ever larger daily dollar moves in gold and silver as they make their way higher.  The world is increasingly losing confidence in currencies and debt. With the focus on the U.S. debt ceiling, few have noticed that Europe is deteriorating and depositors there are itchy. 

The financial world's a mess. Fail to own hard assets at your own risk.

 

My best,

 

Jeff