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BullionBuzz eNewsletter May 30, 2012
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2012-05-30
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Bullion Buzz
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BullionBuzz eNewsletter May 30, 2012
"There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who
believe in gold."
-- Janos Fekete
CHART OF THE WEEK |
REMINDER - One Day Left!
Rickards LIVE Webinar Event
Currency Wars and Capital Markets - No Escape
Thursday, May 31, 2012
2:00 PM - 3:00 PM (EST)
About The Webinar
In 1971, US President Richard Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the US dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.
Participate in this free, live, educational webinar presented by BMG with guest speaker Jim Rickards, author of the bestselling book Currency Wars: The Making of the Next Global Crisis.
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GOLD
Has Gold Hit Bottom, and What Will Drive it to $10,000
Nick Barisheff
The macro-economic conditions that have supported gold’s bull run over the past decade have not change; they’ve become worse. In Europe, the Bloomberg Europe 500 Banks and Financial Services Index, is down around 35% over the last year. In the US, the question is not whether there will be a recession, but when.
Gold is chronically under-owned, even by institutional portfolio and pension fund managers who have a fiduciary responsibility to meet liabilities. They use asset allocation to achieve diversification in order to reduce risk, maximize performance and thus responsibly manage their funds. To ignore the best-performing asset class year after year could conceivably expose managers and trustee to legal liabilities.
The traditional view is that three asset classes (stocks, bonds and cash) are sufficient to achieve diversification. But only precious metals offer negative correlation to those three; a portfolio that has only positively correlated asset classes is not balanced or diversified. Holding cash does not work either; currencies are performing miserably against gold.
More fund managers are realizing that an allocation of between 5 and 10 percent to bullion is prudent. Wainwright & Co. Economics Inc. studied the allocation of gold required to protect against inflation and found that 15% conferred immunity.
Gold has been a store of value and wealth preservation for more than 3,000 years, while all fiat currencies have reverted to zero value after around 30 years. By that measure, the clock is ticking for the US dollar; it has been 41 years since President Nixon abandoned the gold standard in 1971.
The US Treasury Department’s own projections have US debt at $23 trillion by 2015, a 64% increase to the current debt limit. Given gold’s close correlation to US government debt, a gold price in the $2,750 range in to two three years’ time seems reasonable. Now is the time to buy gold, not to sell.
Fund managers, advisors and investors must realize that all bullion investments are not created equal. Uncompromised gold that offers liquidity, no counterparty risk, and allows unitholders to own their bullion outright is the best choice, particularly in an era of increasing risk to the global financial system.
Gold Hasn’t Lost its Mojo – Upward Path to Resume
Jeffrey Nichols
Gold’s performance has been disappointing lately, but its bull market remains in place. Gold’s upward march will continue, and could last another five to ten years given the global economic challenges that lie ahead.
For now, the metal’s short-term prospects remain uncertain. It is at a vulnerable support level, but another round of QE could trigger the next leg up. The Fed may announce in June, followed by all central banks that do not want their currencies appreciate against the dollar; and of course the ECB is about the stage the biggest bailout of all time.
Gold’s slump reflects a tug-of-war between short-term institutional traders, speculators in derivative markets, and the physical markets where long-term investors and central banks continue to accumulate stocks of metal. This, the physical market, is where the long-term price of gold is set.
Mine production has risen in recent years, but much of this growth has occurred in China and Russia, and every ounce these countries produce is absorbed locally by central bank accumulation and private sector demand.
Eurozone troubles, instead of boosting gold, have favoured the US dollar. The stronger dollar led to a short-term bet against gold by institutional traders and speculators. But the greenback is merely the best of a bad bunch, and its recent strength just a reflection of the euro's decline.
At some point, when the Greek economy and financial markets seize up, or Greece exits the Eurozone, or the black plague of lost confidence spreads to other vulnerable, overly indebted nations, or the ECB issues Eurobonds to provide bailouts to Club Med countries and insolvent private banks overexposed to European sovereign debt, gold will be back.
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INVESTMENT
Panic Like it’s March 2009
Chris Puplava
Europe is a mess and the US stock market is suffering from the fallout. While Fed Chairman Bernanke would like to launch another round of quantitative easing, he hasn’t done so because weakness in Europe and a declining stock market have not provided the Fed with enough cover to hit the print button.
However, things are changing in Bernanke’s favour. If central banks step up to the plate, we are likely to see the markets go from risk off to risk on. No one knows when central banks will intervene, or where stock prices will be at that point, but we can expect a flight out of bonds and into stocks when it occurs as stocks’ investment appeal over the US Treasury market is back to levels not seen since March 2009. Given that investor sentiment is also back to the depths of despair seen at the March 2009 lows, the stage is set for central bankers to bump the market higher at a time of deep pessimism.
Puplava discusses Europe’s unraveling; the ideal conditions for Bernanke’s QE3 launch; why stocks should rally strongly on central bank action and be incredibly attractive relative to bonds; and why the stock market is ripe for a bottom.
For now, selling pressure continues to rise and the fact that equities can’t stage a rally in the final hours of trading suggests that lower prices lie ahead. There has yet to be capitulation in the market (a strong decline followed by a sharp intraday rally on high volume). Until we see such an event or hear of central bank intervention, investors should remain defensive with cash on the sidelines. However, when central bank intervention does come, investors have an opportunity to reallocate to stocks and away from bonds. Bonds at current rates are not an attractive option, particularly with yields below the rate of inflation and pessimism rampant.
Could the Global Derivatives Market Tip Over?
David Chapman
Derivatives positions dwarf the asset positions of America’s five largest banks: JPMorgan Chase, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs.
There are various estimates as to the size of the global derivatives market, from $647 trillion (the BIS estimate) to as much as $1,200 trillion ($1.2 quadrillion). At that level, it is 20 times the size of the global economy.
The BIS number only includes over-the-counter, not exchange-traded, derivatives. Overall, the OTC derivatives market has a gross credit exposure of $3.9 trillion. The market capitalization of the world's largest banks, the ones most likely to be involved in the global derivatives market, is $2.6 trillion. The potential credit exposure of derivatives exceeds the banks’ capital.
Using the BIS number of $647 trillion, JPMorgan has the most exposure with at least $70 trillion (possibly $80 trillion) of derivatives against an asset base of $1.8 to $2.2 trillion. JPM is estimated to have credit exposure for their derivatives of 256% of capital. For the top five US banks, the ratio is 316%. This far exceeds the estimated global credit exposure of derivatives when compared to the market cap of the world's largest banks.
The top five US banks are estimated to hold about 44% of the global market in derivatives. Netting agreements, which are supposed to cover upwards of 90% of the market, proved useless during the 2008 financial crash. Taxpayer bailouts were required to protect the integrity of Goldman Sachs, Morgan Stanley and the other major derivative players.
JPM recently reported a $2 billion loss on their derivatives book because of a botched hedge. There is speculation that the figure is closer to $8 billion, and could be as much as $18 billion. Clearly, losses in the global derivatives sector could quickly wipe out the capital of some of the world's largest banks, resulting in massive bailouts.
Could an accident in the global derivatives market cause the next financial panic? It happened in 2008 and since then very little has changed. Except the derivatives market has become even larger.
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ECONOMY
For the Eurozone, the Worst is Yet to Come
Liam Halligan
Prior to the Eurozone’s launch, there was little discussion of its technical flaws. No one listened to those who disagreed with the plan. Now, the Eurozone is such a mess it threatens to spark financial meltdown and serious civil unrest.
Global financial markets are paralyzed by the specter of a Greek exit: investors have slashed their euro exposure; traders fret about financial turmoil; equities gyrate on low volume; institutional investors stockpile cash. Trading is thin and investment is stalled, compounding the lack of growth. Everyone wonders who will be next.
That cranks up welfare payments, lowers tax revenue and makes European sovereign balance sheets look even worse. Propped up by money printing, the bank-government-bank negative feedback loop worsens.
Germany's bond yields are dipping as the borrowing costs of peripheral countries soar. Investors are so desperate, they're lending Berlin short-term money for free. An intra-euro bank run is underway. Mediterranean firms and households are petrified their cash could be converted into devalued drachma or pesetas on any break up.
Despite all this, the EU’s latest summit focused on a rescue scheme—this time ‘project bonds’. Some €230 million has been earmarked to help provide loans that will supposedly attract €4.6 billion in private investment, but the only ‘private’ investors willing to fund such a scheme will be state-controlled commercial banks and heavily regulated pension funds ordered to do so by their political masters.
Project bonds are a step towards Eurobonds—a euphemism for Germany underwriting everyone else's debts. The plan seems to be that Berlin will accept full-on ECB debt monetization in return for a German-directed fiscal union, with powers to raise taxes and make large-scale transfers between countries, while issuing joint Eurobonds.
But Eurozone countries are unlikely to welcome a system based on Germany telling them how much they can borrow and spend. Germany is unlikely to relish that role either. Incredibly, the summit offered almost nothing by way of preparation for a Greek departure.
As the Eurozone meltdown deepens, a chronic lack of periphery bank capital raises the risk of acute liquidity crises. Spain's fourth largest bank just asked for a €19 billion bailout. Catalonia, the country's wealthiest region, says it is bust and central government must pay its bills.
Many of the region's banks are insolvent; the only solution is to let them go bust, while protecting depositors. Otherwise, expect riots, volatile financial markets, more unemployment, ruined lives and intense global and diplomatic fall-out.
Rome Didn’t Fall in a Day
Chris Sullivan
Washington refuses to rein in its excesses; instead of cutting spending, the US prints more money and increases taxes. There's a precedent for this: Rome wasn't built in a day, but it didn't collapse in a day either. Most Romans who lived as the Empire crumbled didn't realize exactly what was happening, but they knew they weren't living in the good old days.
Salvian the Presbyter left a first-hand account of how things went to rot. One thing he mentions repeatedly is how the peasant class was obliterated by oppressive taxation and how small landowners indentured themselves to large landowners who paid their taxes, but in return got their land and their labour, eventually leading to feudalism. Even after the small landowners had lost their land, they still were liable for the tax, thus permanently indenturing them to the wealthy landowner who paid it for them.
Something else Salvian mentions, previously unheard of in the US but becoming much more common, is people fleeing the Empire and renouncing their citizenship.
It wasn't just in fiscal matters that modern times resemble the fall of Rome. Salvian laments the obsession people had with attending the games (today, reality television and sports). There were 175 holidays per year, each with its state-sponsored amusements. The Roman Army had camp followers—women and boys. The shouts of people being killed in defense of the city could not be distinguished from those at the games.
Things declined so far that the public officials whom he classifies as robbers continued to steal from the people even after they no longer held office. This has been refined in modern times to the revolving door system of going from elected office to lobbyist or CEO of some big company that conducts business with the government.
Even then, government imposed price controls, which caused black marketeers to provide for people's wants and needs. The Romans, however, could not print money. They could debase it, but not print it as we do now. They also had no efficient way of spying on the populace or freezing assets, which is now routine. This enables us to postpone but not avert the day of collapse. It allows us to ‘kick the can down the road,’ but at some point we will find that the road is a dead end.
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