Wednesday, May 25, 2011
Silver and Silver Stocks Spring into Life
KMG Gold: "Silver will continue to consolidate with erratic moves in both directions."
Two of our favorite silver producers led the charge today, Endeavour Silver Corporation (EXK) up 9.25% and First Majestic Silver Corporation (AG) up 7.49% as silver prices bounced $1.53/oz in today's trading session.
Silver prices have gained 4.37% in today’s trading session and look to have found some support at the $34.00/oz level, which could form the platform for a re-test of the $40.00/oz level.
Taking a quick look at the technical indicators we can see that there is an imminent crossover on the MACD which is usually a positive sign for silver along with the STO and RSI, both of which are heading north at the moment.
The difficulty is determining just where will silver prices go from here. In the short term, we are of the opinion that silver will continue to consolidate with some erratic moves in both directions. The months of June, July and August have been slow moving historically and we could be in for more of the same. However, it's not a given as many parts of the world are experiencing turmoil at the moment, either politically, economically, or environmentally. The next black swan event could make an appearance as early as tomorrow and change the financial landscape almost immediately, just as the rapid increases in margin requirements knocked the stuffing out of silver prices. One such event could be a similar assault on gold prices which would no doubt have a knock on effect on silver. However, the demand for silver, both by the industrial users and the investment community is strong and growing as suspicion grows regarding the credibility of the fiat currencies.
Also remember that those politicians and officials who control the printing presses have different objectives from that of the retail investor. The top priority for them is to get re-elected and they will continue to ‘buy’ votes with various giveaways to protect their lifestyles. Its short term-ism at its very worst and we are stuck with it. The printing presses will continue to roll as this is all they know how to do. Currencies will leap over each other in the race to the bottom and the people will become, albeit slowly, more aware that their paper money is buying very little indeed. The dawn of this realization has begun and is gathering pace.
To avoid being totally wiped out in the coming carnage try to move some of your wealth, even if you consider yourself to be a poor person, into some form of trade-able hard asset. In that respect silver deserves some consideration. As we have said many times the first step is to acquire physical silver coins and bars and keep them where you can get your hands on them and out with the banking system. When the chips are down the banks will do what the governments tell them to do, regardless of our perceived rights.
The second way to get involved is by investing in a small number of quality silver producing stocks. Now, some of our readers have informed us that they are unable to purchase the stocks that we have recommended due to the inability of their stockbroker to trade on a particular exchange, say the NYSE. To this sort of situation we can only ask if they are providing a service to you or if you are providing a service to them? There are a number of web based trading platforms available to you that free you from such shackles, so wake up and take charge of your own future.
Finally, if you have a stomach that can stand violent oscillations then the use of leverage, through a well thought out options trade could boost your account. However, be warned options can also knock a whole in your account just as quickly, so seek some professional advice before putting your hard earned cash on the table.
In conclusion, we are of the opinion that despite the day to day white noise that is ever present, silver prices will finish the year at much higher price levels than they are now. So take some time and read as widely as you possibly can, formulate your very own protection plan and start to build a position at your own speed, before prices become a little daunting.
Thursday, May 12, 2011
Anatomy Of Silver Manipulation - How Low Can It Go?
Avery Goodman, Seeking Alpha: As we warned our readers on May 1, 2011, when silver had clawed its way back to about $48 per ounce: “We expect another massive price attack in the next few days.”
We came to this conclusion based upon a number of factors, including the impending opening of the Hong Kong Merchantile Exchange, which will be controlled by many of the same international players who control NYMEX. Like clockwork, a vicious attack, perhaps the most ferocious one ever mounted in the history of precious metals, began on Monday, May 2, 2011. We knew it was coming, but to be honest, we didn’t expect the level of ferocity. Following our own suggestions, when silver had tanked by about 18%, we entered into a small speculative long position, using the SIVR silver trust. The price punched right through the minor support level we had chosen, and continued down.
Had we realized the depth of the silver short seller despair, we would have played the game a bit differently. We would have waited longer, bought a lot more later on, and created a much longer term position. As it is, we have lost nearly nothing, and will do it anyway. Nevertheless, as irrational as this kind of thinking is, and as much as we warn people against it, human beings are human beings and we are not happy about putting on a little bet, no matter how small, that fails to catch the bottom of a dip.
The level of despair among short sellers, which is motivating this attack, is growing. Anything could happen at this point. They could give up entirely, or the attack could become more ferocious. We don't know. What we do know is that the short sellers' predicament has just grown worse. They will eventually become even more desperate than they are now as weeks and months pass by. We will explain why shortly.
New and ever larger performance bond deposit requirements are being announced by the NYMEX so-called "clearing house risk committee" (performance bond committee) almost every other day. On top of these substantial increases, the individual clearing members are often making even bigger demands and hiking up performance bond requirements even higher.
We cannot help but wonder if some of these clearing members are themselves short silver, or if they are deathly afraid that other clearing members will default, leaving them footing the bill? Or are they trying to help attack their own customers? To the extent that a clearing member is raising performance bonds above the level of the exchange, customers should say goodbye and never do business with them again.
According the official spokesperson for CME Group, which owns NYMEX, the performance bond increases are designed to address "increased risk". If this were so, however, such changes would apply only to short sellers and new long buyers who purchased up in the higher price ranges. Most of the older long buyers were sitting on huge profits from the upward movement of silver, when the new bond requirements were imposed in the $49 range. They posed no greater risk at all than they did back when they made their purchases at $18, $20, $25 per ounce, etc.
But the exchange and its dealers don't play the game that way. Instead, they apply these changes to everyone, even people who may have bought when silver was down near $18 per ounce, even though these older position holders pose no greater risk of defaulting than before. The exchange committee members are quite expert at all this, and are well aware that the net effect of what they were doing would be to throw people involuntarily out of positions. The effect is carefully calculated and thought out, and is part of the overall process used to artificially control silver prices.
Coupled with the sudden increased performance in bonds, there has been an all-out media effort to convince people that a “bubble is bursting” even though, as we will shortly explain, anyone who is worth his salt as an analyst knows it isn't true. There has NEVER been any bubble in silver in 2011, and therefore, it cannot possibly "burst”. There has simply been an unwinding of a grossly underpriced asset that has been subject to a multi-year price suppression effort.
Be that as it may, this downturn provides, for the first time in a long time, more than mere gambling opportunities. Highly leveraged and undercapitalized speculators have been kicked out of their positions, and they had pushed the price of silver up very fast. It would have gone to the same levels, anyway, and beyond, but the process would have been slower and steadier if the market had been limited to cash buyers and well-capitalized investors.
We have been carefully observing the methods used in this attack and have reached some conclusions. The attack is not sophisticated. It is NOT rocket science. The method is so simple that it is astounding that so few people see it for what it is. Regulators could put an end to it any time they want to. They simply don’t want to. That means, of course, that they are essentially complicit. There are genuine folks over at CFTC, like Commissioner Bart Chilton, but they are operating at an agency which is structurally corrupted, with a revolving door swapping employees to and from the regulator and those who are supposed to be regulated.
The current price attack involves an overwhelming creation of transient short positions that last less than one day. This is expensive to do in terms of upfront cash. But it isn't quite as expensive as it may seem at first glance. Each day, except on Friday, May 6th, more than 10,000 short positions appeared to be transiently created, closed and recreated during the trading day. This must have required posting at least $180 million in performance bonds. However, to give credit to the ingenuity of the manipulators, most cash is recouped by the end of the trading day. With access to Federal Reserve loan windows, putting up an infinite amount of upfront fiat cash in the morning of a trading day is no deterrent.
From what we can see, this is what they are doing, in a highly coordinated fashion:
1) Either using control over the exchange committee system to induce sudden hikes in performance bond requirements, or opportunistically using such hikes. The hikes soften up the market by causing an initial destabilization of accounts of overleveraged long position holders. Some of the big clearing members of NYMEX have enhanced this effect by raising their own requirements higher than the exchange committee, and thereby softening up their own customers more substantially;
2) Using analysts to make extensive commentary to the mass media to the effect that the “silver bubble has burst” in the hope of inducing fear in the marketplace, further softening it up, in preparation for step 3.
3) Using trading “bots” to transiently create thousands and, sometimes, tens of thousands of intra-day short positions, designed to soak up opportunistic buying by better capitalized long side oriented investors. The flooding of the market with this paper supply of imaginary “silver” prevents futures based prices from rising and triggers stop-loss orders among leveraged customers.
4) Closing most intra-day positions into the mass of involuntary liquidations. Sometimes, “artillery” is left on the battlefield by the close of the day. This happens when transient short positions cannot be fully unloaded. In other words, the bots are competing with heavy buying from well-capitalized buyers who now want to pay the "bargain" prices created by the bots, and taking over those positions before the bots have the opportunity to buy them back. This shows up as a net increase in the “open interest” in silver, even as the price is falling. That aberrant result is impossible if a bubble were really “bursting”, because we would have run out of such buyers by now;
5) Rinsing and repeating the same process the next day, and on various days after that, allowing for a few “up” days centered around points of natural technical support, in order to preserve plausible deniability.
Again, CME officials claim that the sudden margin changes are motivated by “high volatility”, and that their actions are not a cause for the recent crash of silver prices. That is disingenuous at best. The changes are not “motivated” by high volatility -- they are the initial cause of the volatility. They knowingly destabilized the accounts of highly leveraged buyers. Those buyers were highly leveraged because the exchange previously encouraged high leverage by marking down performance bond requirements. Sudden upward adjustment of performance bonds creates an opening for trading “bots” to move in, and helps make the manipulation less costly.
If performance bonds were never set in the first place, at ridiculous ultra-low levels, then suddenly raised, then suddenly lowered, over and over again - which is exactly what the exchange has done for years - prices would be stable. Substantial performance bonds, kept the same at ALL times, would mean no "pie-in-the-sky" undercapitalized long buyers drawn into the market. The ability of the manipulators to flush them out, collect their performance bonds, and periodically crash commodity prices would end.
In that scenario, silver and gold would transform back to their 10,000 year old role as the most stable stores of value that exist, and conservative investors would convert their fiat cash, stocks and bonds into precious metals. That is a nightmare scenario for western central bankers, because it is a severe threat to the long term profits of the commercial casino-banks they service, whose tight control over the world economy facilitates the sale of derivatives and control over the contingencies that trigger such derivatives. This tight control cannot exist in an honest money gold/silver base monetary system, and is based primarily upon control of paper and electronic money printing presses
But, in spite of the incredible power of the central banks standing behind them, short sellers are losing this war. Their surface “success” is an illusion. Instead of escaping from liability, their liability is growing. In spite of the propaganda machine, the attack by clearing members against their own customers, and the trading bots, buying interest has remained incredibly high. This is exemplified by the fact that not all of the tens of thousands of transient intra-day short contracts have been closed by the end of the trading day. That is NOT a sign of a bursting bubble but, rather, of just the opposite.
In a normal market, the cost of a relatively fixed supply of goods will always result in rising prices when the number of purchase contracts rise. This is because demand has increased while supply has stayed roughly the same. But, not in our corrupted futures markets. On Tuesday, May 3, 2011, CME Group records show that the silver bars underlying 23 contracts were delivered. That should have reduced “open interest” contracts by 23. Instead, there was a net INCREASE that day of “same-month” positions by 10 contracts. In other words, short sellers will now need to deliver 165,000 additional ounces of silver this month.
On Friday, May 6, 2011, the short sellers must have been proud of themselves. They were able to deliver 243 contracts, or 1.2 million ounces of silver, which is a huge amount. But, the open interest for May delivery only declined by 13 contracts, which means that the artificially cheap prices attracted 230 new long contract buyers who paid cash. The new contracts will need to be delivered this month. As hard as it must have been to find the silver for May 6th delivery, they are now forced to find another 1.15 million ounces somewhere.
The so-called “spot” price is now largely irrelevant, but short sellers have still not acknowledged that fact to themselves. Intense physical silver demand continues. This is amply illustrated by continued backwardation. Dealers at COMEX and the LBMA may create fake prices at will, but the cash market is their achilles' heel. Short sellers have put paper silver on a fire sale at the futures exchanges. Yet they have not improved their position by doing so. They have, instead, insured a worse problem. Cash buyers put the fear of God in the hearts of silver manipulators. Cash buyers can put them into bankruptcy, destroy their power over the market, and discredit the futures markets, LBMA and the central bankers by inducing multiple defaults.
New “urban” myths about mysterious eastern billionaires buying up silver have spread quickly. On April 28, 2011, silver was selling for a high of $49 per ounce. The open interest had fallen to as low as 129,711 as short sellers slowly capitulated, and serious cash buyers took the bait. Allowing higher and higher fiat prices was effective in allowing open short positions to be closed, which is what short sellers must do before it is too late. On one day, for example, in early Asian trading, prices rose temporarily by over 10%. Asian short sellers were breaking ranks and buying back positions at any price. Then the bull-headed spirit of their European and American comrades awoke, and the current attack on silver prices began.
The market is NOT becoming dispirited or shell-shocked, as would have once been the case under similar conditions. Instead, we are seeing heavy buying by well capitalized long buyers who have probably read Andrew McGuire’s emails. They now know the score. They know that this is simply a manipulation event. As of May 5, 2011, the open interest had already risen to 134,804. The evil “Empire” is facing 5,093 new long positions. Two hundred sixty six of those are “same-month” positions, bought with a 100% cash, and need to be delivered this month.
Tens of thousands of other positions have changed hands. The trading “bots” managed to close most of their intra-day shorts into margin calls and stop loss orders, but have not accomplished much in terms of the level of open interest. Tens of thousands of existing contracts plus 5,093 additional hard long positions were unintentionally created by the trading bots, and all of these are now transferred from undercapitalized longs who would never have taken delivery, into much stronger hands.
The percentage of contracts, going forward, that will be forced into delivery as the months pass, will rise as a result of the transfer from weak to strong hands, and the silver short sellers’ problem is now bigger. New buyers have streamed in and bought at lower prices. That is the natural response of any bull market to a major manipulation event like this one. Silver is in a secular bull market. That has not changed as a result of a manipulation event. In fact, nothing has changed, except the unfavorable position of the silver short side manipulators, who are facing a much worse picture now than they did before they started this manipulation.
They have collected performance bond “candy” from undercapitalized investment “babies”. But, they need much more. Short sellers need to create the type of dispirited shell-shocked market they managed to create in late 2008. The effort, back then, made use of the demise of Lehman Brothers to offload hundreds of billions of dollars worth of short positions in all the precious metals in the OTC derivatives market. So far, however, this manipulation event isn't working very well. The only way to bring the number of positions down is to allow the price to rise substantially.
If they abandon the effort now, as Friday's action implies they might, it will be impossible for them to shift their short term price reduction into a longer term situation of altered market perceptions, which is their end goal. The Federal Reserve can give them as much cash as they need to mount as many paper-based attacks as they want, but it can’t give them physical silver. Short sellers will need to “put up” or “shut up”. They need to pay the price for their misconduct over many years.
Short sellers have proven to be so bull-headed that one has to doubt whether they will do the smart thing. The next move might be to flood physical markets with newly “cashed out” baskets of silver bars from the SLV silver trust stockpile. That might dampen pressure from increasing demand, and might even meet the immediate need for physical delivery in the OTC cash markets. Over the long run, however, assuming that the price remains discounted, the bars will quickly disappear and as they raid the stockpile, others will buy SLV shares and also raid the stockpile. SLV may end up stripped of its silver.
Does SLV really have the full amount of silver claimed? It does have a solid-seeming inspection report that says it does. If it doesn't, we may be finding out soon enough. If those who have been dismissed as paranoid people end up being right, and there is not enough silver in the stockpile to cover claims, jail cells will be waiting. The CME Group clearing house risk committee can raise performance bonds to 100% of the amount that long buyers paid for their positions in silver. They can even raise it higher than that, but only at the risk of jail cells, and/or triple damages that cannot be discharged in bankruptcy for its individual members. Meanwhile, manipulators can continue to flood the market with bidding-bots and intra-day transient short positions. They can theoretically absorb all the buying pressure if they are stubborn enough.
They can continue to raid the SLV stockpile to make deliveries, and spin those withdrawals to the media as the "public getting out of silver". But this is not 1980. No one remotely similar to Nelson Bunker Hunt is relying on bank financing to corner the silver market using leveraged positioning. Price pressure is from the cash physical market, not derivatives. COMEX is relatively irrelevant. Nothing the manipulators can do in derivatives markets will relieve the physical market pressure.
Short sellers have replaced weak hands with strong ones who are much more likely to take delivery. This manipulation episode will dramatically unwind, just as it dramatically began, when silver short sellers capitulate, as they must. Prices will shoot far beyond the recent high levels. “Bottom picking”, therefore, may be nice but it isn't absolutely necessary. The prospective price appreciation over the next few months or years should overwhelm any differences in price right now. It won’t matter whether you bought at $50, $40, $35, $20 etc. In a few months, the price will likely be back up, and, in a few years, the price will be many multiples of all those numbers.
Technical support levels still have meaning because manipulators want it to be so. Cash fueled trading “bots”, filled to the brim with Federal Reserve funny money, can be programmed to open as many transient intra-day short positions as needed to punch right through any support levels. But manipulators must preserve an illusion of natural market movement. We can expect loose adherence to chart patterns, allowing bounces where appropriate, and then, punch-throughs.
The only way a psychologically depressed market could now be achieved is by crash prices beneath the long-term trend line, which is around $22.50 per ounce. This would require hundreds of millions of additional trading bot dollars to do. They might try it, at some point, but more likely, they will give up for the moment and return to a slow capitulation. Even if they do push prices down below $22.50, we doubt it would work for very long. Such a battering would cause heavy technical damage, but as noted, this market is not being driven by technical trends.
If they don't achieve the sub-$22.50 level, even most technical analysts relied upon by the big non-manipulation-involved hedge funds and other big players will assume that the silver bull market is still running and that this is merely a deep correction. They will buy back in and run the price back up. In other words, if the manipulators do not achieve a sustainable self-perpetuating shell-shocked market, as was achieved in late 2008, the manipulators will not be able to close short positions without great losses.
It may be possible to use technical analysis to make intra-day, or multi-day gambles on bounces. We would not feel comfortable, however, with recommending that this be done with substantial capital, because the manipulators could suddenly attack again at any time. If they decide to punch through the strong technical support level at $33-34, they will do so with everything they've got. They will need to take down the price very quickly because they need to get it done before so much of the month has passed that they will be impaired in their ability to gather silver to make delivery in the OTC market.
You must think long term now before entering this silver market, because you may well get stuck with a silver position for a longer term than you may expect. But if the manipulators do press the price down below the $22.50 level, you should buy with every dollar you have available, because even though things will look bleak by then, with every media outlet heralding the "bursting of the silver bubble", a few months later, the price will be back to way above $50 again. Prefacing the big fall will probably be a huge technical rally in the U.S. dollar, and a big fall in the stock market. These events may not happen until the end of QE-2 in late June.
On the other hand, if you don't buy now, and, instead rely on the forlorn hope that manipulators will push hard enough to take prices into $20-22 level, you may well lose the excellent opportunities that now exist. There is no way to know, in a manipulated market, whether the manipulators will decide to punch through a particular support level. As we have stated in previous articles, the better way to deal with this is to pick a reasonable price level acceptable to your pocketbook, put in a buy order, and wait. If your buy order is successful, and the price turns up immediately, great. If not, be secure in knowing that you have a long term view, and a position in an asset destined for much more appreciation than we've ever seen before, over the next few years.
In short, it is time to stop thinking about short term gambling, because no metric you use is safe against the depredations of a manipulation that regulators refuse to stop. Buy with the long term in mind and wait for the market to punish the manipulators, which it will. Take physical delivery if you buy at the futures markets. Remember, the primary value of precious metals is NOT in making “big money” from gambling in the banker-controlled gambling casinos. We have always strongly suggested that only very small gambles like those you would make in Las Vegas should be made on a speculative basis. But buying on big dips, like this one, is not a speculative undertaking. It is long-term investing. The long term power of silver, like gold and platinum, is to preserve the buying power you’ve worked for all your life.
The powers-that-be want the U.S. dollar and all other paper fiat currencies to lose value every year. In fact, 2% inflation is their openly stated goal. If you consider compounding, that is an inflation rate that destroys the value of money very rapidly. But the true inflation rate in America is already closer to 6%, not anywhere near the low official numbers that the government likes to report to the media. With a huge increase in the amount of circulating funny-money liquidity around the world, including but not limited to the U.S. dollar, inflation is likely to rise much more sharply from here forward all over the world, not just in the U.S.A. The willingness to tackle this inflation, on the part of policy-makers, is very limited because serious efforts involve a lot of pain to powerful constituencies.
Investing in precious metals means converting U.S. dollars, pounds, euros, etc., into hard "money" that can be manipulated in price, but which cannot be debased. Manipulation has its limits, and since it appears to have been happening in the gold and silver markets for decades, in one form or another, the unwinding that is now beginning will just get more intense with time. No matter what technical support levels they target and take out, the short sellers are not going to extricate themselves without paying big bucks. Knowledge of how the price suppression scheme operates is in the public domain, and it is highly unlikely that manipulators will succeed in shell-shocking markets with their shenanigans, nor suppressing prices, for any significant period of time.
The next step to control prices for several more months will be borrowing enough money from the Fed's loan windows to keep their trading bots active whenever some type of opportunity presents itself, and to become even more aggressive using control of exchange mechanisms to continue sudden increases in performance bonds. Because SLV shareholders tend to be unaware of the fact that they are dealing in a manipulated market, they continue to buy and sell the trust at whatever the spot price may be manipulated to. Thus, short sellers can use opportunistic futures markets attacks to raid SLV silver stockpiles "on the cheap".
This should allow them to obtain enough silver to meet physical delivery demands, and even to periodically flood physical markets. Meanwhile, the reduction in the stockpiles will be spun into a claim that the "bubble is bursting" as "big players" "sell" SLV shares. In fact, they are not selling at all but, rather, cashing shares for silver to meet delivery demands. We doubt, for this reason, that the speculations about impending COMEX defaults have any basis in fact.
Silver investors should understand that the ride is going to be a roller coaster, as it always has been. Going forward, the intensity of that thrill ride is likely to increase proportionally to the desperation of short sellers. The biggest threat to silver prices will be the supposed end of QE-2. Short sellers are likely to view it as another opportunity to attack. But July is also a big delivery month in silver, and the delivery demand will be considerably higher than now, as a result of this price attack and the replacement of weak hands with strong ones.
If the manipulators had strong faith that the cessation of QE will save them, they wouldn't have launched the ongoing attack we are now suffering through. The most likely outcome of the end of quantitative easing (if it really happens) is another opportunistic, but short term manipulation of the silver market, and a crash of stock and bond markets. And, when that happens, people will turn around, load up on precious metals, and force the price back up. The trading bots will need to be turned off for a while after that, lest they bankrupt their operators
We came to this conclusion based upon a number of factors, including the impending opening of the Hong Kong Merchantile Exchange, which will be controlled by many of the same international players who control NYMEX. Like clockwork, a vicious attack, perhaps the most ferocious one ever mounted in the history of precious metals, began on Monday, May 2, 2011. We knew it was coming, but to be honest, we didn’t expect the level of ferocity. Following our own suggestions, when silver had tanked by about 18%, we entered into a small speculative long position, using the SIVR silver trust. The price punched right through the minor support level we had chosen, and continued down.
Had we realized the depth of the silver short seller despair, we would have played the game a bit differently. We would have waited longer, bought a lot more later on, and created a much longer term position. As it is, we have lost nearly nothing, and will do it anyway. Nevertheless, as irrational as this kind of thinking is, and as much as we warn people against it, human beings are human beings and we are not happy about putting on a little bet, no matter how small, that fails to catch the bottom of a dip.
The level of despair among short sellers, which is motivating this attack, is growing. Anything could happen at this point. They could give up entirely, or the attack could become more ferocious. We don't know. What we do know is that the short sellers' predicament has just grown worse. They will eventually become even more desperate than they are now as weeks and months pass by. We will explain why shortly.
New and ever larger performance bond deposit requirements are being announced by the NYMEX so-called "clearing house risk committee" (performance bond committee) almost every other day. On top of these substantial increases, the individual clearing members are often making even bigger demands and hiking up performance bond requirements even higher.
We cannot help but wonder if some of these clearing members are themselves short silver, or if they are deathly afraid that other clearing members will default, leaving them footing the bill? Or are they trying to help attack their own customers? To the extent that a clearing member is raising performance bonds above the level of the exchange, customers should say goodbye and never do business with them again.
According the official spokesperson for CME Group, which owns NYMEX, the performance bond increases are designed to address "increased risk". If this were so, however, such changes would apply only to short sellers and new long buyers who purchased up in the higher price ranges. Most of the older long buyers were sitting on huge profits from the upward movement of silver, when the new bond requirements were imposed in the $49 range. They posed no greater risk at all than they did back when they made their purchases at $18, $20, $25 per ounce, etc.
But the exchange and its dealers don't play the game that way. Instead, they apply these changes to everyone, even people who may have bought when silver was down near $18 per ounce, even though these older position holders pose no greater risk of defaulting than before. The exchange committee members are quite expert at all this, and are well aware that the net effect of what they were doing would be to throw people involuntarily out of positions. The effect is carefully calculated and thought out, and is part of the overall process used to artificially control silver prices.
Coupled with the sudden increased performance in bonds, there has been an all-out media effort to convince people that a “bubble is bursting” even though, as we will shortly explain, anyone who is worth his salt as an analyst knows it isn't true. There has NEVER been any bubble in silver in 2011, and therefore, it cannot possibly "burst”. There has simply been an unwinding of a grossly underpriced asset that has been subject to a multi-year price suppression effort.
Be that as it may, this downturn provides, for the first time in a long time, more than mere gambling opportunities. Highly leveraged and undercapitalized speculators have been kicked out of their positions, and they had pushed the price of silver up very fast. It would have gone to the same levels, anyway, and beyond, but the process would have been slower and steadier if the market had been limited to cash buyers and well-capitalized investors.
We have been carefully observing the methods used in this attack and have reached some conclusions. The attack is not sophisticated. It is NOT rocket science. The method is so simple that it is astounding that so few people see it for what it is. Regulators could put an end to it any time they want to. They simply don’t want to. That means, of course, that they are essentially complicit. There are genuine folks over at CFTC, like Commissioner Bart Chilton, but they are operating at an agency which is structurally corrupted, with a revolving door swapping employees to and from the regulator and those who are supposed to be regulated.
The current price attack involves an overwhelming creation of transient short positions that last less than one day. This is expensive to do in terms of upfront cash. But it isn't quite as expensive as it may seem at first glance. Each day, except on Friday, May 6th, more than 10,000 short positions appeared to be transiently created, closed and recreated during the trading day. This must have required posting at least $180 million in performance bonds. However, to give credit to the ingenuity of the manipulators, most cash is recouped by the end of the trading day. With access to Federal Reserve loan windows, putting up an infinite amount of upfront fiat cash in the morning of a trading day is no deterrent.
From what we can see, this is what they are doing, in a highly coordinated fashion:
1) Either using control over the exchange committee system to induce sudden hikes in performance bond requirements, or opportunistically using such hikes. The hikes soften up the market by causing an initial destabilization of accounts of overleveraged long position holders. Some of the big clearing members of NYMEX have enhanced this effect by raising their own requirements higher than the exchange committee, and thereby softening up their own customers more substantially;
2) Using analysts to make extensive commentary to the mass media to the effect that the “silver bubble has burst” in the hope of inducing fear in the marketplace, further softening it up, in preparation for step 3.
3) Using trading “bots” to transiently create thousands and, sometimes, tens of thousands of intra-day short positions, designed to soak up opportunistic buying by better capitalized long side oriented investors. The flooding of the market with this paper supply of imaginary “silver” prevents futures based prices from rising and triggers stop-loss orders among leveraged customers.
4) Closing most intra-day positions into the mass of involuntary liquidations. Sometimes, “artillery” is left on the battlefield by the close of the day. This happens when transient short positions cannot be fully unloaded. In other words, the bots are competing with heavy buying from well-capitalized buyers who now want to pay the "bargain" prices created by the bots, and taking over those positions before the bots have the opportunity to buy them back. This shows up as a net increase in the “open interest” in silver, even as the price is falling. That aberrant result is impossible if a bubble were really “bursting”, because we would have run out of such buyers by now;
5) Rinsing and repeating the same process the next day, and on various days after that, allowing for a few “up” days centered around points of natural technical support, in order to preserve plausible deniability.
Again, CME officials claim that the sudden margin changes are motivated by “high volatility”, and that their actions are not a cause for the recent crash of silver prices. That is disingenuous at best. The changes are not “motivated” by high volatility -- they are the initial cause of the volatility. They knowingly destabilized the accounts of highly leveraged buyers. Those buyers were highly leveraged because the exchange previously encouraged high leverage by marking down performance bond requirements. Sudden upward adjustment of performance bonds creates an opening for trading “bots” to move in, and helps make the manipulation less costly.
If performance bonds were never set in the first place, at ridiculous ultra-low levels, then suddenly raised, then suddenly lowered, over and over again - which is exactly what the exchange has done for years - prices would be stable. Substantial performance bonds, kept the same at ALL times, would mean no "pie-in-the-sky" undercapitalized long buyers drawn into the market. The ability of the manipulators to flush them out, collect their performance bonds, and periodically crash commodity prices would end.
In that scenario, silver and gold would transform back to their 10,000 year old role as the most stable stores of value that exist, and conservative investors would convert their fiat cash, stocks and bonds into precious metals. That is a nightmare scenario for western central bankers, because it is a severe threat to the long term profits of the commercial casino-banks they service, whose tight control over the world economy facilitates the sale of derivatives and control over the contingencies that trigger such derivatives. This tight control cannot exist in an honest money gold/silver base monetary system, and is based primarily upon control of paper and electronic money printing presses
But, in spite of the incredible power of the central banks standing behind them, short sellers are losing this war. Their surface “success” is an illusion. Instead of escaping from liability, their liability is growing. In spite of the propaganda machine, the attack by clearing members against their own customers, and the trading bots, buying interest has remained incredibly high. This is exemplified by the fact that not all of the tens of thousands of transient intra-day short contracts have been closed by the end of the trading day. That is NOT a sign of a bursting bubble but, rather, of just the opposite.
In a normal market, the cost of a relatively fixed supply of goods will always result in rising prices when the number of purchase contracts rise. This is because demand has increased while supply has stayed roughly the same. But, not in our corrupted futures markets. On Tuesday, May 3, 2011, CME Group records show that the silver bars underlying 23 contracts were delivered. That should have reduced “open interest” contracts by 23. Instead, there was a net INCREASE that day of “same-month” positions by 10 contracts. In other words, short sellers will now need to deliver 165,000 additional ounces of silver this month.
On Friday, May 6, 2011, the short sellers must have been proud of themselves. They were able to deliver 243 contracts, or 1.2 million ounces of silver, which is a huge amount. But, the open interest for May delivery only declined by 13 contracts, which means that the artificially cheap prices attracted 230 new long contract buyers who paid cash. The new contracts will need to be delivered this month. As hard as it must have been to find the silver for May 6th delivery, they are now forced to find another 1.15 million ounces somewhere.
The so-called “spot” price is now largely irrelevant, but short sellers have still not acknowledged that fact to themselves. Intense physical silver demand continues. This is amply illustrated by continued backwardation. Dealers at COMEX and the LBMA may create fake prices at will, but the cash market is their achilles' heel. Short sellers have put paper silver on a fire sale at the futures exchanges. Yet they have not improved their position by doing so. They have, instead, insured a worse problem. Cash buyers put the fear of God in the hearts of silver manipulators. Cash buyers can put them into bankruptcy, destroy their power over the market, and discredit the futures markets, LBMA and the central bankers by inducing multiple defaults.
New “urban” myths about mysterious eastern billionaires buying up silver have spread quickly. On April 28, 2011, silver was selling for a high of $49 per ounce. The open interest had fallen to as low as 129,711 as short sellers slowly capitulated, and serious cash buyers took the bait. Allowing higher and higher fiat prices was effective in allowing open short positions to be closed, which is what short sellers must do before it is too late. On one day, for example, in early Asian trading, prices rose temporarily by over 10%. Asian short sellers were breaking ranks and buying back positions at any price. Then the bull-headed spirit of their European and American comrades awoke, and the current attack on silver prices began.
The market is NOT becoming dispirited or shell-shocked, as would have once been the case under similar conditions. Instead, we are seeing heavy buying by well capitalized long buyers who have probably read Andrew McGuire’s emails. They now know the score. They know that this is simply a manipulation event. As of May 5, 2011, the open interest had already risen to 134,804. The evil “Empire” is facing 5,093 new long positions. Two hundred sixty six of those are “same-month” positions, bought with a 100% cash, and need to be delivered this month.
Tens of thousands of other positions have changed hands. The trading “bots” managed to close most of their intra-day shorts into margin calls and stop loss orders, but have not accomplished much in terms of the level of open interest. Tens of thousands of existing contracts plus 5,093 additional hard long positions were unintentionally created by the trading bots, and all of these are now transferred from undercapitalized longs who would never have taken delivery, into much stronger hands.
The percentage of contracts, going forward, that will be forced into delivery as the months pass, will rise as a result of the transfer from weak to strong hands, and the silver short sellers’ problem is now bigger. New buyers have streamed in and bought at lower prices. That is the natural response of any bull market to a major manipulation event like this one. Silver is in a secular bull market. That has not changed as a result of a manipulation event. In fact, nothing has changed, except the unfavorable position of the silver short side manipulators, who are facing a much worse picture now than they did before they started this manipulation.
They have collected performance bond “candy” from undercapitalized investment “babies”. But, they need much more. Short sellers need to create the type of dispirited shell-shocked market they managed to create in late 2008. The effort, back then, made use of the demise of Lehman Brothers to offload hundreds of billions of dollars worth of short positions in all the precious metals in the OTC derivatives market. So far, however, this manipulation event isn't working very well. The only way to bring the number of positions down is to allow the price to rise substantially.
If they abandon the effort now, as Friday's action implies they might, it will be impossible for them to shift their short term price reduction into a longer term situation of altered market perceptions, which is their end goal. The Federal Reserve can give them as much cash as they need to mount as many paper-based attacks as they want, but it can’t give them physical silver. Short sellers will need to “put up” or “shut up”. They need to pay the price for their misconduct over many years.
Short sellers have proven to be so bull-headed that one has to doubt whether they will do the smart thing. The next move might be to flood physical markets with newly “cashed out” baskets of silver bars from the SLV silver trust stockpile. That might dampen pressure from increasing demand, and might even meet the immediate need for physical delivery in the OTC cash markets. Over the long run, however, assuming that the price remains discounted, the bars will quickly disappear and as they raid the stockpile, others will buy SLV shares and also raid the stockpile. SLV may end up stripped of its silver.
Does SLV really have the full amount of silver claimed? It does have a solid-seeming inspection report that says it does. If it doesn't, we may be finding out soon enough. If those who have been dismissed as paranoid people end up being right, and there is not enough silver in the stockpile to cover claims, jail cells will be waiting. The CME Group clearing house risk committee can raise performance bonds to 100% of the amount that long buyers paid for their positions in silver. They can even raise it higher than that, but only at the risk of jail cells, and/or triple damages that cannot be discharged in bankruptcy for its individual members. Meanwhile, manipulators can continue to flood the market with bidding-bots and intra-day transient short positions. They can theoretically absorb all the buying pressure if they are stubborn enough.
They can continue to raid the SLV stockpile to make deliveries, and spin those withdrawals to the media as the "public getting out of silver". But this is not 1980. No one remotely similar to Nelson Bunker Hunt is relying on bank financing to corner the silver market using leveraged positioning. Price pressure is from the cash physical market, not derivatives. COMEX is relatively irrelevant. Nothing the manipulators can do in derivatives markets will relieve the physical market pressure.
Short sellers have replaced weak hands with strong ones who are much more likely to take delivery. This manipulation episode will dramatically unwind, just as it dramatically began, when silver short sellers capitulate, as they must. Prices will shoot far beyond the recent high levels. “Bottom picking”, therefore, may be nice but it isn't absolutely necessary. The prospective price appreciation over the next few months or years should overwhelm any differences in price right now. It won’t matter whether you bought at $50, $40, $35, $20 etc. In a few months, the price will likely be back up, and, in a few years, the price will be many multiples of all those numbers.
Technical support levels still have meaning because manipulators want it to be so. Cash fueled trading “bots”, filled to the brim with Federal Reserve funny money, can be programmed to open as many transient intra-day short positions as needed to punch right through any support levels. But manipulators must preserve an illusion of natural market movement. We can expect loose adherence to chart patterns, allowing bounces where appropriate, and then, punch-throughs.
The only way a psychologically depressed market could now be achieved is by crash prices beneath the long-term trend line, which is around $22.50 per ounce. This would require hundreds of millions of additional trading bot dollars to do. They might try it, at some point, but more likely, they will give up for the moment and return to a slow capitulation. Even if they do push prices down below $22.50, we doubt it would work for very long. Such a battering would cause heavy technical damage, but as noted, this market is not being driven by technical trends.
If they don't achieve the sub-$22.50 level, even most technical analysts relied upon by the big non-manipulation-involved hedge funds and other big players will assume that the silver bull market is still running and that this is merely a deep correction. They will buy back in and run the price back up. In other words, if the manipulators do not achieve a sustainable self-perpetuating shell-shocked market, as was achieved in late 2008, the manipulators will not be able to close short positions without great losses.
It may be possible to use technical analysis to make intra-day, or multi-day gambles on bounces. We would not feel comfortable, however, with recommending that this be done with substantial capital, because the manipulators could suddenly attack again at any time. If they decide to punch through the strong technical support level at $33-34, they will do so with everything they've got. They will need to take down the price very quickly because they need to get it done before so much of the month has passed that they will be impaired in their ability to gather silver to make delivery in the OTC market.
You must think long term now before entering this silver market, because you may well get stuck with a silver position for a longer term than you may expect. But if the manipulators do press the price down below the $22.50 level, you should buy with every dollar you have available, because even though things will look bleak by then, with every media outlet heralding the "bursting of the silver bubble", a few months later, the price will be back to way above $50 again. Prefacing the big fall will probably be a huge technical rally in the U.S. dollar, and a big fall in the stock market. These events may not happen until the end of QE-2 in late June.
On the other hand, if you don't buy now, and, instead rely on the forlorn hope that manipulators will push hard enough to take prices into $20-22 level, you may well lose the excellent opportunities that now exist. There is no way to know, in a manipulated market, whether the manipulators will decide to punch through a particular support level. As we have stated in previous articles, the better way to deal with this is to pick a reasonable price level acceptable to your pocketbook, put in a buy order, and wait. If your buy order is successful, and the price turns up immediately, great. If not, be secure in knowing that you have a long term view, and a position in an asset destined for much more appreciation than we've ever seen before, over the next few years.
In short, it is time to stop thinking about short term gambling, because no metric you use is safe against the depredations of a manipulation that regulators refuse to stop. Buy with the long term in mind and wait for the market to punish the manipulators, which it will. Take physical delivery if you buy at the futures markets. Remember, the primary value of precious metals is NOT in making “big money” from gambling in the banker-controlled gambling casinos. We have always strongly suggested that only very small gambles like those you would make in Las Vegas should be made on a speculative basis. But buying on big dips, like this one, is not a speculative undertaking. It is long-term investing. The long term power of silver, like gold and platinum, is to preserve the buying power you’ve worked for all your life.
The powers-that-be want the U.S. dollar and all other paper fiat currencies to lose value every year. In fact, 2% inflation is their openly stated goal. If you consider compounding, that is an inflation rate that destroys the value of money very rapidly. But the true inflation rate in America is already closer to 6%, not anywhere near the low official numbers that the government likes to report to the media. With a huge increase in the amount of circulating funny-money liquidity around the world, including but not limited to the U.S. dollar, inflation is likely to rise much more sharply from here forward all over the world, not just in the U.S.A. The willingness to tackle this inflation, on the part of policy-makers, is very limited because serious efforts involve a lot of pain to powerful constituencies.
Investing in precious metals means converting U.S. dollars, pounds, euros, etc., into hard "money" that can be manipulated in price, but which cannot be debased. Manipulation has its limits, and since it appears to have been happening in the gold and silver markets for decades, in one form or another, the unwinding that is now beginning will just get more intense with time. No matter what technical support levels they target and take out, the short sellers are not going to extricate themselves without paying big bucks. Knowledge of how the price suppression scheme operates is in the public domain, and it is highly unlikely that manipulators will succeed in shell-shocking markets with their shenanigans, nor suppressing prices, for any significant period of time.
The next step to control prices for several more months will be borrowing enough money from the Fed's loan windows to keep their trading bots active whenever some type of opportunity presents itself, and to become even more aggressive using control of exchange mechanisms to continue sudden increases in performance bonds. Because SLV shareholders tend to be unaware of the fact that they are dealing in a manipulated market, they continue to buy and sell the trust at whatever the spot price may be manipulated to. Thus, short sellers can use opportunistic futures markets attacks to raid SLV silver stockpiles "on the cheap".
This should allow them to obtain enough silver to meet physical delivery demands, and even to periodically flood physical markets. Meanwhile, the reduction in the stockpiles will be spun into a claim that the "bubble is bursting" as "big players" "sell" SLV shares. In fact, they are not selling at all but, rather, cashing shares for silver to meet delivery demands. We doubt, for this reason, that the speculations about impending COMEX defaults have any basis in fact.
Silver investors should understand that the ride is going to be a roller coaster, as it always has been. Going forward, the intensity of that thrill ride is likely to increase proportionally to the desperation of short sellers. The biggest threat to silver prices will be the supposed end of QE-2. Short sellers are likely to view it as another opportunity to attack. But July is also a big delivery month in silver, and the delivery demand will be considerably higher than now, as a result of this price attack and the replacement of weak hands with strong ones.
If the manipulators had strong faith that the cessation of QE will save them, they wouldn't have launched the ongoing attack we are now suffering through. The most likely outcome of the end of quantitative easing (if it really happens) is another opportunistic, but short term manipulation of the silver market, and a crash of stock and bond markets. And, when that happens, people will turn around, load up on precious metals, and force the price back up. The trading bots will need to be turned off for a while after that, lest they bankrupt their operators
Friday, May 06, 2011
Silver rise ends five-day rout
(Reuters) - Silver rose 2 percent on Friday, snapping a five-day losing streak that cut prices by almost a third, while gold rose after encouraging U.S. jobs data triggered a broad bounce in beaten-down commodities.
KMG Gold Recycling
Silver, hit by a succession of margin hikes that nearly doubled costs, had suffered the biggest sell-off since prices collapsed in 1980. Dealers, however, said the 30 percent slide from last week's record high was overdone.
Precious metals rallied early with other markets after data showed private-sector hiring hit a five-year high in April. But metals pared gains when the dollar surged against the euro after a German media report suggested Greece had raised the possibility of leaving the euro zone. Greece denied the report.
"There is no reason why silver should have taken such a big hit. It's all margin-related," said COMEX floor option trader Dominic Cognata.
"At some point, it becomes a buying opportunity for people who missed out on the last silver rally to get back in right now."
Investors also bought bullish silver options as the prices of options fell heavily over the last week, Cognata said.
Spot silver initially traded as low as $33.22, its weakest since February 25, pressured by follow-through selling after it plunged 12 percent on Thursday. It was up 1.8 percent at $35.30 by 4:10 p.m. EDT. U.S. futures trading was active, with volume nearly three times its 250-day average.
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COMEX OPEN INTEREST UP
Open interest in U.S. COMEX silver futures rose 3 percent on Thursday even as prices fell sharply, a sign the market remains vulnerable to further selling, traders said.
"We find it disconcerting for it means that the liquidation that is needed to clear the market's collective head has not actually taken place," said Dennis Gartman, publisher of the Gartman Letter.
The price of the U.S. June silver contract fell as much as 13 percent on Thursday, leading a broad decline in the commodities sector. On Friday, June was down over 2 percent.
"There was liquidation, but then there were new people getting in and going with the momentum trade" to short-sell silver, said COMEX options floor trader Jonathan Jossen.
Silver is heading for its worst week since the Hunt Brothers collapse in 1980, after shedding 26 percent this week as higher futures margin requirements prompted speculators to unwind bullish positions.
Silver has slumped around 35 percent since touching a record high of $49.51 an ounce on April 28. A major factor behind the sell-off was higher margins for silver traded on the Chicago Mercantile Exchange Group (CME.O), which raises trading costs.
A record $1 billion outflow from the iShares Silver Trust (SLV.P) in the week ended Wednesday helped feed silver's torrid price decline, just as the fund's earlier inflows aided the prior rally.
"The ease of access from exchange-traded products can be the tail that wags the dog," said Roger Nusbaum, chief investment officer at Your Source Financial. ETF trading and share redemptions "can be a disruptive force in the short term, but it is the sort of thing that will flame out," he said.
The commodities sector was broadly higher after the positive U.S. jobs report which suggested the economic recovery would regain speed this quarter after stumbling in the first three months of the year. That view suffered setbacks earlier this week as other reports pointed to a slowing labor market.
GOLD UP ON PHYSICAL BUYING
Gold also bounced on Friday as jewelers, physical buyers and bargain hunters, especially in Asia, took advantage of lower prices.
Spot gold gained 1.4 percent to $1,491.80 an ounce, still sharply below a record high of $1,575.79 posted on May 2. COMEX June gold futures settled up $10.20 at $1,491.60, moving in a range from $1,471.10 to $1,498.50.
For the week, gold lost 5 percent, the worst weekly performance since late February 2009. Sentiment among precious metals investors also took a hit after high-profile investor George Soros, who was bullish on gold and a top investor in gold funds, has been selling gold and silver in the past month or so, traders said.
Indians, the world's biggest buyers of bullion, took gold's latest tumble as another incentive to buy on Akshaya Tritiya, one of the major gold-buying festivals, and as India's wedding season gathered pace.
Platinum group metals also rose in tandem with gold and silver. Spot platinum gained 1.3 percent to $1,782 an ounce and palladium was up 0.6 percent at $711.22.
KMG Gold Recycling
KMG Gold Recycling
Silver, hit by a succession of margin hikes that nearly doubled costs, had suffered the biggest sell-off since prices collapsed in 1980. Dealers, however, said the 30 percent slide from last week's record high was overdone.
Precious metals rallied early with other markets after data showed private-sector hiring hit a five-year high in April. But metals pared gains when the dollar surged against the euro after a German media report suggested Greece had raised the possibility of leaving the euro zone. Greece denied the report.
"There is no reason why silver should have taken such a big hit. It's all margin-related," said COMEX floor option trader Dominic Cognata.
"At some point, it becomes a buying opportunity for people who missed out on the last silver rally to get back in right now."
Investors also bought bullish silver options as the prices of options fell heavily over the last week, Cognata said.
Spot silver initially traded as low as $33.22, its weakest since February 25, pressured by follow-through selling after it plunged 12 percent on Thursday. It was up 1.8 percent at $35.30 by 4:10 p.m. EDT. U.S. futures trading was active, with volume nearly three times its 250-day average.
KMG Gold Recycling
COMEX OPEN INTEREST UP
Open interest in U.S. COMEX silver futures rose 3 percent on Thursday even as prices fell sharply, a sign the market remains vulnerable to further selling, traders said.
"We find it disconcerting for it means that the liquidation that is needed to clear the market's collective head has not actually taken place," said Dennis Gartman, publisher of the Gartman Letter.
The price of the U.S. June silver contract fell as much as 13 percent on Thursday, leading a broad decline in the commodities sector. On Friday, June was down over 2 percent.
"There was liquidation, but then there were new people getting in and going with the momentum trade" to short-sell silver, said COMEX options floor trader Jonathan Jossen.
Silver is heading for its worst week since the Hunt Brothers collapse in 1980, after shedding 26 percent this week as higher futures margin requirements prompted speculators to unwind bullish positions.
Silver has slumped around 35 percent since touching a record high of $49.51 an ounce on April 28. A major factor behind the sell-off was higher margins for silver traded on the Chicago Mercantile Exchange Group (CME.O), which raises trading costs.
A record $1 billion outflow from the iShares Silver Trust (SLV.P) in the week ended Wednesday helped feed silver's torrid price decline, just as the fund's earlier inflows aided the prior rally.
"The ease of access from exchange-traded products can be the tail that wags the dog," said Roger Nusbaum, chief investment officer at Your Source Financial. ETF trading and share redemptions "can be a disruptive force in the short term, but it is the sort of thing that will flame out," he said.
The commodities sector was broadly higher after the positive U.S. jobs report which suggested the economic recovery would regain speed this quarter after stumbling in the first three months of the year. That view suffered setbacks earlier this week as other reports pointed to a slowing labor market.
GOLD UP ON PHYSICAL BUYING
Gold also bounced on Friday as jewelers, physical buyers and bargain hunters, especially in Asia, took advantage of lower prices.
Spot gold gained 1.4 percent to $1,491.80 an ounce, still sharply below a record high of $1,575.79 posted on May 2. COMEX June gold futures settled up $10.20 at $1,491.60, moving in a range from $1,471.10 to $1,498.50.
For the week, gold lost 5 percent, the worst weekly performance since late February 2009. Sentiment among precious metals investors also took a hit after high-profile investor George Soros, who was bullish on gold and a top investor in gold funds, has been selling gold and silver in the past month or so, traders said.
Indians, the world's biggest buyers of bullion, took gold's latest tumble as another incentive to buy on Akshaya Tritiya, one of the major gold-buying festivals, and as India's wedding season gathered pace.
Platinum group metals also rose in tandem with gold and silver. Spot platinum gained 1.3 percent to $1,782 an ounce and palladium was up 0.6 percent at $711.22.
KMG Gold Recycling
Friday, May 06, 2011
Silver Futures Plunge 27% in Week, Most Since 1975; Gold Rebounds on Comex
KMG Gold Recycling - Silver futures fell, capping the biggest weekly plunge since at least 1975, on mounting sales by investors following increases in Comex margin requirements. Gold rebounded, halting a three-day slide.
Silver tumbled 27 percent this week after CME Group Ltd., the Comex owner, boosted the cash amount needed for a speculative position by 84 percent in two weeks. Yesterday, holdings of the metal in exchange-traded products dropped the most in three years. Gold had the largest weekly drop in a year.
“At the close of business on Monday, silver’s got another bump in margins,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “Gold doesn’t have the technical breakdown that silver’s had. All gold has to do is hold its value when everything else crumbles around it.”
Silver futures for July delivery fell 95.3 cents, or 2.6 percent, to settle at $35.287 an ounce at 2:11 p.m. on the Comex in New York. On April 25, the price reached $49.845, a 31-year high.
The minimum amount of cash that must be deposited when borrowing from brokers to trade will rise to $21,600 a contract after May 9, CME Group said on May 4. That’s an increase from $11,745 two weeks ago.
“The higher cash-margin requirements simply cannot be met by all participants, and when a trader can’t make margin, the underlying security is often liquidated,” Lachlan Shaw, a commodity analyst at Commonwealth Bank of Australia (CBA), said in a report. “Further silver-price falls are possible.”
ETP Holdings Tumble
Silver assets held in ETPs tumbled 3.6 percent to 14,546.99 metric tons yesterday, the biggest decline since Jan. 2, 2008, while gold holdings fell 0.7 percent to 2,057.08 tons, the biggest drop in three months, according to data compiled by Bloomberg.
The liquidation in precious metals has been “egregiously violent,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter. “Speculative fervor needed to have a bit of cold water splashed in its face.”
Gold futures for June delivery rose $10.20, or 0.7 percent, to $1,491.60 an ounce. Yesterday, the price touched $1,462.50, the lowest since April 14. This week, the metal dropped 4.2 percent, the most since May 2010.
“Gold below $1,500 is a line in the sand,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “There’s a scramble for gold because a lot of people don’t want to miss the move up.”
The metal reached a record $1,577.40 on May 2.
Barclays Capital recommended buying gold after the 4.9 percent drop in the previous three days.
Palladium futures for June delivery rose $5.50, or 0.8 percent, to $716.30 an ounce on the New York Mercantile Exchange. This week, the metal dropped 9.6 percent, the most since July.
Platinum futures for July delivery gained $8.20, or 0.5 percent, to $1,786.40 an ounce. This week, the price dropped 4.2 percent, the most since November.
KMG Gold Recycling
Silver tumbled 27 percent this week after CME Group Ltd., the Comex owner, boosted the cash amount needed for a speculative position by 84 percent in two weeks. Yesterday, holdings of the metal in exchange-traded products dropped the most in three years. Gold had the largest weekly drop in a year.
“At the close of business on Monday, silver’s got another bump in margins,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “Gold doesn’t have the technical breakdown that silver’s had. All gold has to do is hold its value when everything else crumbles around it.”
Silver futures for July delivery fell 95.3 cents, or 2.6 percent, to settle at $35.287 an ounce at 2:11 p.m. on the Comex in New York. On April 25, the price reached $49.845, a 31-year high.
The minimum amount of cash that must be deposited when borrowing from brokers to trade will rise to $21,600 a contract after May 9, CME Group said on May 4. That’s an increase from $11,745 two weeks ago.
“The higher cash-margin requirements simply cannot be met by all participants, and when a trader can’t make margin, the underlying security is often liquidated,” Lachlan Shaw, a commodity analyst at Commonwealth Bank of Australia (CBA), said in a report. “Further silver-price falls are possible.”
ETP Holdings Tumble
Silver assets held in ETPs tumbled 3.6 percent to 14,546.99 metric tons yesterday, the biggest decline since Jan. 2, 2008, while gold holdings fell 0.7 percent to 2,057.08 tons, the biggest drop in three months, according to data compiled by Bloomberg.
The liquidation in precious metals has been “egregiously violent,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter. “Speculative fervor needed to have a bit of cold water splashed in its face.”
Gold futures for June delivery rose $10.20, or 0.7 percent, to $1,491.60 an ounce. Yesterday, the price touched $1,462.50, the lowest since April 14. This week, the metal dropped 4.2 percent, the most since May 2010.
“Gold below $1,500 is a line in the sand,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “There’s a scramble for gold because a lot of people don’t want to miss the move up.”
The metal reached a record $1,577.40 on May 2.
Barclays Capital recommended buying gold after the 4.9 percent drop in the previous three days.
Palladium futures for June delivery rose $5.50, or 0.8 percent, to $716.30 an ounce on the New York Mercantile Exchange. This week, the metal dropped 9.6 percent, the most since July.
Platinum futures for July delivery gained $8.20, or 0.5 percent, to $1,786.40 an ounce. This week, the price dropped 4.2 percent, the most since November.
KMG Gold Recycling
Friday, May 06, 2011
Central Bank Buying and Gold's Sudden Price Fall
Source: Julian Phillips, Gold Forecaster (5/6/11)
KMG Gold Recycling
"The cautious hunger for gold remains persistent and arrives on the dips."
We have seen new surprising and strong demand from global central banks in the last week. This demand occurred over the last two months and had to compete with other strong demand from all sides of the gold market. As we move into the quiet season for gold and have experienced a short sharp correction so far how will central banks react? This week we received news that South America has now joined Asia, Russia, the Middle East and the Far East in buying gold for the national gold and foreign exchange reserves. Will the correction we are now seeing in the gold price affect central bank policies of buying gold?
Bolivia
Bolivia reported an increase of 7 tons of gold, taking its gold holdings to 35.3 tons, last week. While Bolivia has not made any public comment on this increase, it is very likely that the central bank has simply decided to restore its gold holdings relative to its growing foreign currency reserves, similar to other recent emerging market central bank purchases.
This is an encouraging development for the gold price, because other central banks may follow suit. This will set a trend that will see price-insensitive demand grow from 'official' quarters.
Mexico
Mexico's buying of gold in February and March amounted to 93.3 tons of gold, is one of the most rapid programs of accumulation on record. With reserves now just over 100 tons in total, the market is holding its breath to see if it is an ongoing buyer.
Mexico's vigorous purchase of gold over the last two months surprised the market by its speed and size. For any central bank to buy 93 tons in this market is a clear statement that faith in the U.S. dollar is falling fast. We do expect other emerging South American nations to follow suit over time, alongside many of the world's emerging economies.
KMG Gold Recycling
How Central Banks Buy Gold
Buying programs by central banks usually follows a particular pattern. Central banks buy to hold, not to trade or profit from. They are a monetary asset held for the most extreme of national economic crises. This affects the way they buy for their reserves. The most preferred manner is to buy their own local production, as this is done away from the markets that really do make the gold price. The only impact on the global gold market is to lower supply through the absence of that country's production.
The price paid to local miners is related to the market price at the time of the purchase, irrespective of the volume. The price paid by the central banks is not considered important but the volume acquired is. Central banks will deal in a way that takes only the gold available on the market at any time. This is done by 'buying the dips' or simply by notifying their bullion bank dealers that they are buyers of a minimum amount when it becomes available. When prices run ahead as supplies diminish, central banks will not chase prices, simply take what's offered to them. This prevents the gold price from rising.
Will Central Bank Buying End?
What is clear throughout the world is that central banks remain determined to keep their gold and foreign exchange reserves balanced with gold an integral part of those reserves. The cessation of European central banks sales nearly two years ago confirmed this, as do the ongoing purchases by Russia and China. Even in the Middle East oil producing nations are ensuring that they have gold in their reserves. This is a practice that is unlikely to end in the future. The days when the market feared central banks unloading all the gold they had are far gone. It is clear that gold will remain a key part of the global monetary scene as instability and uncertainty become entrenched over the next few years.
We are watching global central bank behavior to see if the extremely worrying dollar health will accelerate gold purchases. The South American central bank's action has confirmed that this is the case. We do expect more news on this front.
This Week's Gold Selloff
This makes the sudden selloffs we saw this week and the subsequent recovery so interesting. We won't be informed of whether it was central banks, which picked up the gold coming onto the market, but we do expect them to be one of the buyers.
With newly mined gold production of around 5 tons a day reaching the physical markets a sudden additional amount of 5 or 10 tons will hammer the price. Frantic calls to buying central banks would be made but perhaps the buy orders had to wait until London was open before it could be bought. Meanwhile, in New York, the price would fall heavily. The news that such volumes could be bought anonymously through London would reach the ears of all global buying central banks. You can be sure that they would be linked to the London Fix by phone at the next Fix.
The net result would be what we saw this last week, a large fall and a quick recovery. For some months now we have been forecasting that corrections will become short and sharp. What usually took weeks or months now takes days. This is because gold is not a commodity or a barbarous relic but a monetary metal.
KMG Gold Recycling
Gold-Positive Global Economy
With the developed world's economic news points down to an anemic performance there is every incentive to avoid a drop in the value of developed world currencies by buying gold, as we have just seen in the last 18 months. Remember too that gold, since the turn of the century, has been rising in boom times and bust. Only in the latter half of 2007 did we see the gold price fall as investors in the developed world deleveraged their positions as the downturn made leveraged positions far more vulnerable. Investors had to find liquidity to fill the holes all falling markets created. Hence, their desire for liquidity became overwhelming. Such over-leveraged positions are a thing of the past, but those that are still there disappear fast on such days as we saw this week.
The awareness of the vulnerability of investors positions has made them react more quickly, adding to market volatility. But such volatility is short-term, as the cautious hunger for gold remains persistent and arrives 'on the dips.' Underlying, the precious metal markets is the insatiable demand from the Asian emerging markets, which, while it comes in jerks, is never-ending.
Again, like central bank demand, Asian demand is interested in acquiring volume. Their price concerns are restricted to knowing they have not overpaid, but have bought at prices that will hold. They will only sell if they believe the price has risen to far too fast and may fall soon. Once the price has fallen they re-enter at lower levels, consistent with their objectives of holding gold long-term as financial security. They see gold just the same as the developed world sees cash.
KMG Gold Recycling
KMG Gold Recycling
"The cautious hunger for gold remains persistent and arrives on the dips."
We have seen new surprising and strong demand from global central banks in the last week. This demand occurred over the last two months and had to compete with other strong demand from all sides of the gold market. As we move into the quiet season for gold and have experienced a short sharp correction so far how will central banks react? This week we received news that South America has now joined Asia, Russia, the Middle East and the Far East in buying gold for the national gold and foreign exchange reserves. Will the correction we are now seeing in the gold price affect central bank policies of buying gold?
Bolivia
Bolivia reported an increase of 7 tons of gold, taking its gold holdings to 35.3 tons, last week. While Bolivia has not made any public comment on this increase, it is very likely that the central bank has simply decided to restore its gold holdings relative to its growing foreign currency reserves, similar to other recent emerging market central bank purchases.
This is an encouraging development for the gold price, because other central banks may follow suit. This will set a trend that will see price-insensitive demand grow from 'official' quarters.
Mexico
Mexico's buying of gold in February and March amounted to 93.3 tons of gold, is one of the most rapid programs of accumulation on record. With reserves now just over 100 tons in total, the market is holding its breath to see if it is an ongoing buyer.
Mexico's vigorous purchase of gold over the last two months surprised the market by its speed and size. For any central bank to buy 93 tons in this market is a clear statement that faith in the U.S. dollar is falling fast. We do expect other emerging South American nations to follow suit over time, alongside many of the world's emerging economies.
KMG Gold Recycling
How Central Banks Buy Gold
Buying programs by central banks usually follows a particular pattern. Central banks buy to hold, not to trade or profit from. They are a monetary asset held for the most extreme of national economic crises. This affects the way they buy for their reserves. The most preferred manner is to buy their own local production, as this is done away from the markets that really do make the gold price. The only impact on the global gold market is to lower supply through the absence of that country's production.
The price paid to local miners is related to the market price at the time of the purchase, irrespective of the volume. The price paid by the central banks is not considered important but the volume acquired is. Central banks will deal in a way that takes only the gold available on the market at any time. This is done by 'buying the dips' or simply by notifying their bullion bank dealers that they are buyers of a minimum amount when it becomes available. When prices run ahead as supplies diminish, central banks will not chase prices, simply take what's offered to them. This prevents the gold price from rising.
Will Central Bank Buying End?
What is clear throughout the world is that central banks remain determined to keep their gold and foreign exchange reserves balanced with gold an integral part of those reserves. The cessation of European central banks sales nearly two years ago confirmed this, as do the ongoing purchases by Russia and China. Even in the Middle East oil producing nations are ensuring that they have gold in their reserves. This is a practice that is unlikely to end in the future. The days when the market feared central banks unloading all the gold they had are far gone. It is clear that gold will remain a key part of the global monetary scene as instability and uncertainty become entrenched over the next few years.
We are watching global central bank behavior to see if the extremely worrying dollar health will accelerate gold purchases. The South American central bank's action has confirmed that this is the case. We do expect more news on this front.
This Week's Gold Selloff
This makes the sudden selloffs we saw this week and the subsequent recovery so interesting. We won't be informed of whether it was central banks, which picked up the gold coming onto the market, but we do expect them to be one of the buyers.
With newly mined gold production of around 5 tons a day reaching the physical markets a sudden additional amount of 5 or 10 tons will hammer the price. Frantic calls to buying central banks would be made but perhaps the buy orders had to wait until London was open before it could be bought. Meanwhile, in New York, the price would fall heavily. The news that such volumes could be bought anonymously through London would reach the ears of all global buying central banks. You can be sure that they would be linked to the London Fix by phone at the next Fix.
The net result would be what we saw this last week, a large fall and a quick recovery. For some months now we have been forecasting that corrections will become short and sharp. What usually took weeks or months now takes days. This is because gold is not a commodity or a barbarous relic but a monetary metal.
KMG Gold Recycling
Gold-Positive Global Economy
With the developed world's economic news points down to an anemic performance there is every incentive to avoid a drop in the value of developed world currencies by buying gold, as we have just seen in the last 18 months. Remember too that gold, since the turn of the century, has been rising in boom times and bust. Only in the latter half of 2007 did we see the gold price fall as investors in the developed world deleveraged their positions as the downturn made leveraged positions far more vulnerable. Investors had to find liquidity to fill the holes all falling markets created. Hence, their desire for liquidity became overwhelming. Such over-leveraged positions are a thing of the past, but those that are still there disappear fast on such days as we saw this week.
The awareness of the vulnerability of investors positions has made them react more quickly, adding to market volatility. But such volatility is short-term, as the cautious hunger for gold remains persistent and arrives 'on the dips.' Underlying, the precious metal markets is the insatiable demand from the Asian emerging markets, which, while it comes in jerks, is never-ending.
Again, like central bank demand, Asian demand is interested in acquiring volume. Their price concerns are restricted to knowing they have not overpaid, but have bought at prices that will hold. They will only sell if they believe the price has risen to far too fast and may fall soon. Once the price has fallen they re-enter at lower levels, consistent with their objectives of holding gold long-term as financial security. They see gold just the same as the developed world sees cash.
KMG Gold Recycling
Thursday, May 05, 2011
Gold Price Dips Below $1,500, Silver Plunge Continues
The gold price moved lower Thursday morning, declining $10.00 to $1,509 per ounce. KMG Gold Recycling live gold prices.
The gold price moved lower overnight, falling below $1,500 to a low of $1,496.25 amid broad-based liquidation in stock and commodity markets. Silver remains immersed in a violent correction, dropping another 3.1% to $38.10 per ounce after touching a low of $37.36 earlier this morning. Silver prices have crashed 21% this week while the gold price has lost 3.5%.
The share prices of gold and silver mining companies moved lower, led by declines in Barrick Gold (ABX) and Goldcorp (GG), which sank 2% and 1%, respectively. Barrick, the worlds’ largest gold producer has dropped 7.5% over the past eight trading days on the back of soft gold prices and a takeover bid for copper company, Equinox Minerals that has been ill-received by the market.
Gold prices showed a muted reaction to news early Thursday that applications for jobless benefits rose 43,000 to 474,000 last week, considerably worse than the 400,000 to 420,000 consensus among economists. The bleak outlook on the employment front should keep Bernanke and the Fed in the dovish camp on monetary policy, lending support for the gold price.
KMG Gold Recycling live gold prices.
Wednesday saw the gold price continue to retreat, as the yellow metal fell to as low as $1,505 before paring its losses and closing near $1,515 per ounce. Silver tumbled alongside the gold price, briefly dropping below $39 before finishing down by $2.44, or 5.9%, at $39.19 per ounce.
The sell-off in the gold price on Wednesday was fueled by a Wall Street Journal report that several large investors – including George Soros and John Burbank – liquidated a considerable portion of their gold and silver holdings. The story noted that Soros Fund Management purchased gold and silver over the past two years to protect against the Federal Reserve’s response to the risks of deflation. However, Soros now believes that deflationary risks have dissipated significantly, making the rationale for holding positions tied to the gold price less attractive.
Burbank, founder of hedge fund Passport Capital, reduced the size of his gold positions in order to lock in profits, according to an individual close to the firm. However, the source noted that Burbank remains bullish on the gold price over the longer-term, but feels that the price of gold is due for a meaningful correction at this time.
Late Wednesday afternoon, a report surfaced that legendary investor and billionaire Carlos Slim, the world’s wealthiest individual, has been actively selling silver futures contracts 2-3 years out. Silver prices moved lower yet again this morning on the heels of the news and on liquidation of speculative net long positions on the COMEX.
Returning to gold, in contrast to the views of George Soros, another prominent investor reiterated his bullish forecast on the yellow metal. John Paulson – who with $36 billion under management at Paulson & Co. runs the world’s third-largest hedge fund – told investors this week that the price of gold could reach $4,000 per ounce.
Paulson’s bullish prediction on the gold price echoed positive comments he recently made to France’s Les Echos. There, the hedge fund magnate stated that “In these times of uncertainty for paper based currency, I feel more secure in holding gold; [it] offers good protection against the paper currencies devaluation and even the possibility of generating a return on fixed investment.”
Paulson went on to discuss the Federal Reserve’s quantitative easing programs, contending that “It is undeniable that this monetary expansion is equivalent to running the printing press.” He later stated that “gold has always been a safe haven against inflation and a safe haven in times of political instability.”
As a result, Paulson forecasted that inflation will reach double digits in the next three to five years, and investors will continue to seek out investments tied to the gold price in order to protect against these inflationary risks.
KMG Gold Recycling live gold prices.
The gold price moved lower overnight, falling below $1,500 to a low of $1,496.25 amid broad-based liquidation in stock and commodity markets. Silver remains immersed in a violent correction, dropping another 3.1% to $38.10 per ounce after touching a low of $37.36 earlier this morning. Silver prices have crashed 21% this week while the gold price has lost 3.5%.
The share prices of gold and silver mining companies moved lower, led by declines in Barrick Gold (ABX) and Goldcorp (GG), which sank 2% and 1%, respectively. Barrick, the worlds’ largest gold producer has dropped 7.5% over the past eight trading days on the back of soft gold prices and a takeover bid for copper company, Equinox Minerals that has been ill-received by the market.
Gold prices showed a muted reaction to news early Thursday that applications for jobless benefits rose 43,000 to 474,000 last week, considerably worse than the 400,000 to 420,000 consensus among economists. The bleak outlook on the employment front should keep Bernanke and the Fed in the dovish camp on monetary policy, lending support for the gold price.
KMG Gold Recycling live gold prices.
Wednesday saw the gold price continue to retreat, as the yellow metal fell to as low as $1,505 before paring its losses and closing near $1,515 per ounce. Silver tumbled alongside the gold price, briefly dropping below $39 before finishing down by $2.44, or 5.9%, at $39.19 per ounce.
The sell-off in the gold price on Wednesday was fueled by a Wall Street Journal report that several large investors – including George Soros and John Burbank – liquidated a considerable portion of their gold and silver holdings. The story noted that Soros Fund Management purchased gold and silver over the past two years to protect against the Federal Reserve’s response to the risks of deflation. However, Soros now believes that deflationary risks have dissipated significantly, making the rationale for holding positions tied to the gold price less attractive.
Burbank, founder of hedge fund Passport Capital, reduced the size of his gold positions in order to lock in profits, according to an individual close to the firm. However, the source noted that Burbank remains bullish on the gold price over the longer-term, but feels that the price of gold is due for a meaningful correction at this time.
Late Wednesday afternoon, a report surfaced that legendary investor and billionaire Carlos Slim, the world’s wealthiest individual, has been actively selling silver futures contracts 2-3 years out. Silver prices moved lower yet again this morning on the heels of the news and on liquidation of speculative net long positions on the COMEX.
Returning to gold, in contrast to the views of George Soros, another prominent investor reiterated his bullish forecast on the yellow metal. John Paulson – who with $36 billion under management at Paulson & Co. runs the world’s third-largest hedge fund – told investors this week that the price of gold could reach $4,000 per ounce.
Paulson’s bullish prediction on the gold price echoed positive comments he recently made to France’s Les Echos. There, the hedge fund magnate stated that “In these times of uncertainty for paper based currency, I feel more secure in holding gold; [it] offers good protection against the paper currencies devaluation and even the possibility of generating a return on fixed investment.”
Paulson went on to discuss the Federal Reserve’s quantitative easing programs, contending that “It is undeniable that this monetary expansion is equivalent to running the printing press.” He later stated that “gold has always been a safe haven against inflation and a safe haven in times of political instability.”
As a result, Paulson forecasted that inflation will reach double digits in the next three to five years, and investors will continue to seek out investments tied to the gold price in order to protect against these inflationary risks.
KMG Gold Recycling live gold prices.
Monday, May 02, 2011
Understanding Where We Are in Silver's Bull Market
Source: David Banister, Market Trend Forecast (5/2/11)
"After consolidation, buy silver stocks on any pullback with haste."
KMG Gold Recycling
"After consolidation, buy silver stocks on any pullback with haste."
KMG Gold Recycling
Last August, I told my subscribers to prepare for a monster rally in silver, which at the time of my forecast was $18.73 per ounce. I drew up a chart and predicted a huge rally to $29 an ounce, and we ended up at $31 or so just a few months later. This was entirely a crowd behavioral move that I foresaw in advance, based on patterns that R.N. Elliott developed in the 1920's and 1930's. My theory was besides the crowd pattern (a 20-month odd Triangle consolidation), that investor's would begin to view silver as "Poor man's gold" and buy it. Literally, the idea is as simple as investors will simply think that "gold is too expensive, but silver is cheap". That is the explosion power that is behind this move from $19 to $50 an ounce since late August 2010.
KMG Gold Recycling
Below is the original chart I sent to my subscribers outlining this triangle pattern and the likely move.
KMG Gold Recycling
After silver ran hard and fast, it left a lot of talking heads on CNBC and everywhere else scratching their heads and wondering what just happened. If you learn and understand the basics of Elliott Wave Theory, you can begin to foresee what is about to happen and stop scratching your head all the time. Watching the analysts on CNBC is like watching the Monday morning quarterbacks following an NFL Sunday. After that massive silver run from $18 to $31, it was time for a correction and I called for $25 to $26.50 as likely in a normal pessimistic crowd wave 2 pattern down. Once that completed, I sent my subscribers the chart below outlining another Bull wave to $39–$45 per ounce.
KMG Gold Recycling
Silver then eventually ran to $45 per ounce in April of 2011 and had a brief spike to near $50 to test the all time highs just in the past week or so. The action has been wild since then, because after a wave pattern from $18 to $31, then back to $26, then up to $47… the crowd will begin to turn mildly pessimistic in a current "wave 4 " correction pattern. This is when you will begin to hear excuses for silver dropping, including believe it or not blamed on the death of Osama Bin Laden. In truth, whatever happens near term to explain the current correction in silver is simply Monday morning quarterbacking. Using the current day's headlines to explain the action that I already know is coming. Other excuses are the change in margin requirements on silver contracts and the squaring of positions at end of month.
I expect silver to correct to the 40 to $42.75 areas based on my Fibonacci work and Elliott Wave views, and after this 4th wave consolidation we will see a surge to as high as $60/oz. Any pullbacks in silver should be bought here and same with the silver stocks post haste. Below is my latest chart forecast on silver.
Saturday, April 30, 2011
Doug Casey: Precious Metals vs. the USD
Source: Karen Roche of The Gold Report (4/29/11)
KMG Gold Recycling
Doug Casey One sure upshot of the quantitative easing money flooding the stock market will be further distortions, chaos and unpredictability that make the value-investing proposition difficult, if not impossible, according to Casey Research Chairman Doug Casey. On the eve of a sold-out Casey Research Summit in Boca Raton, Florida, Doug returns to The Gold Report. In this exclusive interview, he warns, "Like it or not, you're going to be forced to be a speculator."
The Gold Report: When the average investor turns on the news, even on financial channels, they hear that the U.S. economy is in the best shape it's been in for three or four years. While the experts say the recovery is slower than anticipated, they expect its slow recovery will equate to a long, slow growth cycle similar to that after World War II. You have a contrary view.
Doug Casey: The only things that are doing well are the stock and bond markets. But the markets and the economy are totally different things—except, over a very long period of time, there's no necessary correlation between the economy doing well and the market doing well. My view is that the market is as high as it is right now—with the Dow over 12,000—solely and entirely because the Federal Reserve has created trillions of dollars, as other central banks around the world have created trillions of their currency units. Those currency units have to go somewhere, and a lot of them have gone into the stock market.
KMG Gold Recycling
As a general rule, I don't believe in conspiracy theories and I don't believe anything's big enough to manipulate the market successfully over a long period. At the same time, the government recognizes that most people conflate the Dow with the economy, so it is directing money toward the market to keep it up. Of course, the government wants to keep it up for other reasons—not just because it thinks the economy rests on the psychology of the people, which is complete nonsense. Psychology is just about the most ephemeral thing on which you could possibly base an economy. It can blow away like a pile of feathers in a hurricane.
TGR: So, you're saying we're confusing the market's performance with the economy's performance?
DC: Yes. The fact is that the economy, itself, is doing very badly. The numbers are phonied up. I spend a lot of time in Argentina. Anybody with any sense knows you can't believe the numbers coming out of the Argentinean Government Statistical Bureau, nor can you (any longer) believe the numbers that come out of Washington D.C. The inflation numbers consider only the things the government wants to look at and are artificially low. It's the same with the unemployment numbers. None of these things is believable.
TGR: Isn't the unemployment figure a lagging indicator of a rebounding economy?
DC: If you look at the way unemployment was computed until the early 1980s—something that John Williams from ShadowStats does—the numbers would indicate about 20% unemployment today. Besides, even while the population keeps rising, the number of people reported as actually working is level or even lower. Most indicators of the economic establishment, in my view, don't really make any sense. GDP, for instance, includes government spending—much of which amounts to paying some people to dig ditches during the day and other people to fill in for them at night. So-called "defense" spending is almost totally wasted capital. The practice of economics today is pathetic and laughable.
TGR: So, the economy is not rebounding?
DC: No. My take on this is that we entered what I call the "Greater Depression" in 2007. And now, because the government has printed up trillions of dollars in the last couple of years, we're in the eye of the hurricane. We've only gone through the leading edge of the storm. People think this will just be another cyclical recovery like all the others since WW II. But it's not. It's going to wind up with the currency being destroyed. It's going to be a disaster. . .a worldwide catastrophe.
TGR: You indicated that the government is using these mass infusions of made-up money to prop up the stock market due to the psychological factor—that people will think the economy's doing well because the market is doing well. However, we hear that a lot of that money has been caught up in the banks. Would you comment on that?
DC: As I said, that money has to go somewhere. The banks have been borrowing from the Fed at something like 0.5% and investing it in government securities at 2%, 3% or 4%, depending on the maturity. So, much of that money has been a direct gift to the banks; and they're basically making an arbitrage spread of 2%–4%. So, yes, that's happening with some of the money. Still, it doesn't all just sit in these Treasury securities. A great deal of it, inevitably, goes into the stock market.
TGR: You also said that psychology isn't the only reason the government wants to see the stock market go higher.
DC: Right. Pension funds have a great deal of their assets in stocks. Certainly, many funds run by government entities, such as the state and city employee pension funds, are approaching bankruptcy despite the fact that the Fed has driven interest rates to historic lows, artificially pumping up both stocks and bonds. And, I might add, keeping property prices higher than they would be otherwise. When interest rates rise eventually—and they will go up a lot—it'll be something to behold in the markets.
TGR: You mentioned John Williams who's in your speaker lineup for the Casey Research Summit, The Next Few Years. Another of your speakers is Stansberry Associates Founder Porter Stansberry, who's been making two points about the devaluation of the U.S. dollar. One point he makes in his The End of America video concerns the quantitative easing (QE) you mentioned—those trillions of dollars. But Porter also anticipates the U.S. government announcing a devaluation of the currency similar to what England did in 1970. Do you see that type of scenario occurring, as well?
DC: When the U.S. government last officially devalued the dollar in August 1971, it had been fixed to $35 per ounce to gold. In other words, before that, any foreign government could take the dollars it owned and trade them in at the Treasury for gold. Nixon devalued the dollar by raising it to $38/oz., and then to $42/oz. It was completely academic, anyway, because he wouldn't redeem gold from the Treasury at any price.
But because the dollar isn't fixed against anything now, the government can't officially devalue it. It's a floating market. The government's going to devalue the dollar by printing more of the damn things and letting them lose value gradually—actually the loss will no longer be gradual, but quite fast from here on out. But it's not going to do so formally by re-fixing the dollar against some other currency or against gold. I'm not sure Porter's phrasing it in the best way, but he's quite correct in his conclusion and his prescriptions as to how to profit from it. At this point, the dollar is nothing more than a floating abstraction, an IOU nothing on the part of a manifestly bankrupt government.
TGR: Another abstraction is the fact that the Treasury says the money it is printing has a multiplier effect when it gets into the U.S. economy, so it can pull those dollars back when the time comes. Is that a viable alternative to offset the devaluation caused by printing more money?
DC: You have to look first at the immediate and direct effects of what the government's doing, and then at the delayed and indirect effects. And sure, just as it's injecting all this money into the economy—mainly by the Fed buying U.S. government bonds—theoretically, it can take it out of the economy by doing the opposite. But I just don't see that happening.
TGR: Why not?
DC: One of the reasons is that the U.S. government, itself, is running annual trillion-dollar deficits as far as the eye can see. I think those deficits will go higher—not lower. So, where's that money going to come from? Where will it get trillions of dollars to fund the U.S. government every year?
China isn't going to buy this paper and Japan will be selling its U.S. government paper because, if nothing else, it'll need to buy things to redo the northeast part of the country. Nobody else is going to buy that trillion-dollar deficit either, so it'll have to be the Federal Reserve. In fact, the Fed will have to buy much more and, therefore, create more money. That's what happens.
TGR: This currency crisis isn't unique to the U.S. You just brought up Japan. And aren't all the European countries doing the same thing?
DC: The U.S., unfortunately, is not unique. This is going to be a worldwide catastrophe. It's been a disaster for every country that's done this in the past—Zimbabwe, Germany, Hungary, Yugoslavia and countries in South America—but those were within only those particular countries. In most of those cases, people never trusted their governments; so, they had significant assets outside the country in a form other than the local currency. The problem now is that the U.S. dollar is the world's currency and all of these central banks own USDs as the backing for their own currencies. All these other countries will wind up finding that they don't have any assets after all. That's going to happen all over the world.
TGR: With countries around the globe facing the same issue, should anyone hold currencies?
DC: No. Sure, you need local currency to go to the store and buy a loaf of bread. But for liquid assets you're trying to save, it's insane to own currencies at this point because they're all going to reach their intrinsic value. I've been recommending for many years that people buy gold and own gold for their savings—serious capital they want to put aside in liquid form. With gold now over $1,500/oz. and silver at $48, people who followed that advice have made a lot of money. That's the good news. The bad news is that very few people have done so. Newbies to the game are paying $1,500/oz. for gold. It's going higher, but it's no longer the bargain that it was. The important thing to remember, though, is that gold is the only financial asset that's not simultaneously someone else's liability. That's why it's always been used as money and why it's likely to be reinstituted as money.
TGR: From your viewpoint, how does a person with any wealth preserve it during this tumultuous period other than by investing in gold?
DC: Frankly, I don't know. I own beef and dairy cattle, which are a good place to be; but that's a business, and it's not practical for most people. I think it boils down to gold.
TGR: But what investments should they be looking at these days?
DC: There really aren't investments anymore. With trillions of newly created currency units floating around the world, things will become very chaotic and unpredictable shortly. It's very hard to invest using any kind of Graham-and-Dodd methodology when things are that chaotic. Whether you like it or not, you're going to be forced to be a speculator in the years to come. A speculator is somebody who tries to capitalize on politically caused distortions in the marketplace. There wouldn't be many speculators, or many of those distortions in the marketplace, if we lived in a free-market society. But we don't.
TGR: So, speculation will supplant value investing?
DC: Well, investing is best defined as allocating capital in a way that it reliably produces more capital. The government is going to make that quite hard in the years to come with much higher taxes, much higher inflation and draconian regulations. You will actually be forced to speculate. That's a pity, from the point of view of the economy as a whole. But I kind of like it, in a way. Few people know how to be speculators, so I should be able to make a huge amount of money in the next few years. Unfortunately, it'll be at a time when most people are losing their shirts. But I don't make the rules. I just play the game.
TGR: As you look over the next year or two with your speculator hat on, what sectors do you expect to experience the most distortion and, therefore, offer the most opportunity for the speculator?
DC: One sure bet is the collapse of the U.S. dollar. Always bet against the USD and you'll be on the winning side of the trade. A very direct way to make that bet is by shorting long-term U.S. government bonds because, eventually, interest rates will go to the moon, which means bond prices will collapse.
You can also look at the precious metals because, at some point, when people panic into them, their price curves will go parabolic. Mining stocks are likely to draw a lot of money, so they could go wild as they have many times over the last 40 years.
TGR: Your summit has presentations scheduled on silver, gold, currencies, Asia, real estate, agriculture and even more. What do you expect to be the major takeaway this time?
DC: What we're facing now is something of absolutely historic importance—the biggest thing that's gone on in the world since the industrial revolution. Many things will be completely overturned in the years to come. What's happening now in the Arab world, with all of these corrupt kleptocracies being challenged and overthrown, is just the beginning. We haven't seen the end of this in any of these countries—Tunisia, Egypt, Syria, Algeria. Of course, Saudi Arabia will be the big one. Everything's going to be overturned. And all these stooges that the U.S. government has been supporting for years could very well lose their heads. It's going to be the most tumultuous decade for hundreds of years, bigger than what happened in the 1930s and 1940s.
TGR: Any last things you'd like to tell our readers?
DC: Yeah. Hold on to your hats. You're in for a wild ride.
KMG Gold Recycling
KMG Gold Recycling
Doug Casey One sure upshot of the quantitative easing money flooding the stock market will be further distortions, chaos and unpredictability that make the value-investing proposition difficult, if not impossible, according to Casey Research Chairman Doug Casey. On the eve of a sold-out Casey Research Summit in Boca Raton, Florida, Doug returns to The Gold Report. In this exclusive interview, he warns, "Like it or not, you're going to be forced to be a speculator."
The Gold Report: When the average investor turns on the news, even on financial channels, they hear that the U.S. economy is in the best shape it's been in for three or four years. While the experts say the recovery is slower than anticipated, they expect its slow recovery will equate to a long, slow growth cycle similar to that after World War II. You have a contrary view.
Doug Casey: The only things that are doing well are the stock and bond markets. But the markets and the economy are totally different things—except, over a very long period of time, there's no necessary correlation between the economy doing well and the market doing well. My view is that the market is as high as it is right now—with the Dow over 12,000—solely and entirely because the Federal Reserve has created trillions of dollars, as other central banks around the world have created trillions of their currency units. Those currency units have to go somewhere, and a lot of them have gone into the stock market.
KMG Gold Recycling
As a general rule, I don't believe in conspiracy theories and I don't believe anything's big enough to manipulate the market successfully over a long period. At the same time, the government recognizes that most people conflate the Dow with the economy, so it is directing money toward the market to keep it up. Of course, the government wants to keep it up for other reasons—not just because it thinks the economy rests on the psychology of the people, which is complete nonsense. Psychology is just about the most ephemeral thing on which you could possibly base an economy. It can blow away like a pile of feathers in a hurricane.
TGR: So, you're saying we're confusing the market's performance with the economy's performance?
DC: Yes. The fact is that the economy, itself, is doing very badly. The numbers are phonied up. I spend a lot of time in Argentina. Anybody with any sense knows you can't believe the numbers coming out of the Argentinean Government Statistical Bureau, nor can you (any longer) believe the numbers that come out of Washington D.C. The inflation numbers consider only the things the government wants to look at and are artificially low. It's the same with the unemployment numbers. None of these things is believable.
TGR: Isn't the unemployment figure a lagging indicator of a rebounding economy?
DC: If you look at the way unemployment was computed until the early 1980s—something that John Williams from ShadowStats does—the numbers would indicate about 20% unemployment today. Besides, even while the population keeps rising, the number of people reported as actually working is level or even lower. Most indicators of the economic establishment, in my view, don't really make any sense. GDP, for instance, includes government spending—much of which amounts to paying some people to dig ditches during the day and other people to fill in for them at night. So-called "defense" spending is almost totally wasted capital. The practice of economics today is pathetic and laughable.
TGR: So, the economy is not rebounding?
DC: No. My take on this is that we entered what I call the "Greater Depression" in 2007. And now, because the government has printed up trillions of dollars in the last couple of years, we're in the eye of the hurricane. We've only gone through the leading edge of the storm. People think this will just be another cyclical recovery like all the others since WW II. But it's not. It's going to wind up with the currency being destroyed. It's going to be a disaster. . .a worldwide catastrophe.
TGR: You indicated that the government is using these mass infusions of made-up money to prop up the stock market due to the psychological factor—that people will think the economy's doing well because the market is doing well. However, we hear that a lot of that money has been caught up in the banks. Would you comment on that?
DC: As I said, that money has to go somewhere. The banks have been borrowing from the Fed at something like 0.5% and investing it in government securities at 2%, 3% or 4%, depending on the maturity. So, much of that money has been a direct gift to the banks; and they're basically making an arbitrage spread of 2%–4%. So, yes, that's happening with some of the money. Still, it doesn't all just sit in these Treasury securities. A great deal of it, inevitably, goes into the stock market.
TGR: You also said that psychology isn't the only reason the government wants to see the stock market go higher.
DC: Right. Pension funds have a great deal of their assets in stocks. Certainly, many funds run by government entities, such as the state and city employee pension funds, are approaching bankruptcy despite the fact that the Fed has driven interest rates to historic lows, artificially pumping up both stocks and bonds. And, I might add, keeping property prices higher than they would be otherwise. When interest rates rise eventually—and they will go up a lot—it'll be something to behold in the markets.
TGR: You mentioned John Williams who's in your speaker lineup for the Casey Research Summit, The Next Few Years. Another of your speakers is Stansberry Associates Founder Porter Stansberry, who's been making two points about the devaluation of the U.S. dollar. One point he makes in his The End of America video concerns the quantitative easing (QE) you mentioned—those trillions of dollars. But Porter also anticipates the U.S. government announcing a devaluation of the currency similar to what England did in 1970. Do you see that type of scenario occurring, as well?
DC: When the U.S. government last officially devalued the dollar in August 1971, it had been fixed to $35 per ounce to gold. In other words, before that, any foreign government could take the dollars it owned and trade them in at the Treasury for gold. Nixon devalued the dollar by raising it to $38/oz., and then to $42/oz. It was completely academic, anyway, because he wouldn't redeem gold from the Treasury at any price.
But because the dollar isn't fixed against anything now, the government can't officially devalue it. It's a floating market. The government's going to devalue the dollar by printing more of the damn things and letting them lose value gradually—actually the loss will no longer be gradual, but quite fast from here on out. But it's not going to do so formally by re-fixing the dollar against some other currency or against gold. I'm not sure Porter's phrasing it in the best way, but he's quite correct in his conclusion and his prescriptions as to how to profit from it. At this point, the dollar is nothing more than a floating abstraction, an IOU nothing on the part of a manifestly bankrupt government.
TGR: Another abstraction is the fact that the Treasury says the money it is printing has a multiplier effect when it gets into the U.S. economy, so it can pull those dollars back when the time comes. Is that a viable alternative to offset the devaluation caused by printing more money?
DC: You have to look first at the immediate and direct effects of what the government's doing, and then at the delayed and indirect effects. And sure, just as it's injecting all this money into the economy—mainly by the Fed buying U.S. government bonds—theoretically, it can take it out of the economy by doing the opposite. But I just don't see that happening.
TGR: Why not?
DC: One of the reasons is that the U.S. government, itself, is running annual trillion-dollar deficits as far as the eye can see. I think those deficits will go higher—not lower. So, where's that money going to come from? Where will it get trillions of dollars to fund the U.S. government every year?
China isn't going to buy this paper and Japan will be selling its U.S. government paper because, if nothing else, it'll need to buy things to redo the northeast part of the country. Nobody else is going to buy that trillion-dollar deficit either, so it'll have to be the Federal Reserve. In fact, the Fed will have to buy much more and, therefore, create more money. That's what happens.
TGR: This currency crisis isn't unique to the U.S. You just brought up Japan. And aren't all the European countries doing the same thing?
DC: The U.S., unfortunately, is not unique. This is going to be a worldwide catastrophe. It's been a disaster for every country that's done this in the past—Zimbabwe, Germany, Hungary, Yugoslavia and countries in South America—but those were within only those particular countries. In most of those cases, people never trusted their governments; so, they had significant assets outside the country in a form other than the local currency. The problem now is that the U.S. dollar is the world's currency and all of these central banks own USDs as the backing for their own currencies. All these other countries will wind up finding that they don't have any assets after all. That's going to happen all over the world.
TGR: With countries around the globe facing the same issue, should anyone hold currencies?
DC: No. Sure, you need local currency to go to the store and buy a loaf of bread. But for liquid assets you're trying to save, it's insane to own currencies at this point because they're all going to reach their intrinsic value. I've been recommending for many years that people buy gold and own gold for their savings—serious capital they want to put aside in liquid form. With gold now over $1,500/oz. and silver at $48, people who followed that advice have made a lot of money. That's the good news. The bad news is that very few people have done so. Newbies to the game are paying $1,500/oz. for gold. It's going higher, but it's no longer the bargain that it was. The important thing to remember, though, is that gold is the only financial asset that's not simultaneously someone else's liability. That's why it's always been used as money and why it's likely to be reinstituted as money.
TGR: From your viewpoint, how does a person with any wealth preserve it during this tumultuous period other than by investing in gold?
DC: Frankly, I don't know. I own beef and dairy cattle, which are a good place to be; but that's a business, and it's not practical for most people. I think it boils down to gold.
TGR: But what investments should they be looking at these days?
DC: There really aren't investments anymore. With trillions of newly created currency units floating around the world, things will become very chaotic and unpredictable shortly. It's very hard to invest using any kind of Graham-and-Dodd methodology when things are that chaotic. Whether you like it or not, you're going to be forced to be a speculator in the years to come. A speculator is somebody who tries to capitalize on politically caused distortions in the marketplace. There wouldn't be many speculators, or many of those distortions in the marketplace, if we lived in a free-market society. But we don't.
TGR: So, speculation will supplant value investing?
DC: Well, investing is best defined as allocating capital in a way that it reliably produces more capital. The government is going to make that quite hard in the years to come with much higher taxes, much higher inflation and draconian regulations. You will actually be forced to speculate. That's a pity, from the point of view of the economy as a whole. But I kind of like it, in a way. Few people know how to be speculators, so I should be able to make a huge amount of money in the next few years. Unfortunately, it'll be at a time when most people are losing their shirts. But I don't make the rules. I just play the game.
TGR: As you look over the next year or two with your speculator hat on, what sectors do you expect to experience the most distortion and, therefore, offer the most opportunity for the speculator?
DC: One sure bet is the collapse of the U.S. dollar. Always bet against the USD and you'll be on the winning side of the trade. A very direct way to make that bet is by shorting long-term U.S. government bonds because, eventually, interest rates will go to the moon, which means bond prices will collapse.
You can also look at the precious metals because, at some point, when people panic into them, their price curves will go parabolic. Mining stocks are likely to draw a lot of money, so they could go wild as they have many times over the last 40 years.
TGR: Your summit has presentations scheduled on silver, gold, currencies, Asia, real estate, agriculture and even more. What do you expect to be the major takeaway this time?
DC: What we're facing now is something of absolutely historic importance—the biggest thing that's gone on in the world since the industrial revolution. Many things will be completely overturned in the years to come. What's happening now in the Arab world, with all of these corrupt kleptocracies being challenged and overthrown, is just the beginning. We haven't seen the end of this in any of these countries—Tunisia, Egypt, Syria, Algeria. Of course, Saudi Arabia will be the big one. Everything's going to be overturned. And all these stooges that the U.S. government has been supporting for years could very well lose their heads. It's going to be the most tumultuous decade for hundreds of years, bigger than what happened in the 1930s and 1940s.
TGR: Any last things you'd like to tell our readers?
DC: Yeah. Hold on to your hats. You're in for a wild ride.
KMG Gold Recycling
Friday, April 29, 2011
Caution Light on For Silver and Gold Prices
Thursday, April 28, 2011
KMG Gold Recycling
Gold Price Close Today : 1530.80
Change : 14.20 or 0.9%
Silver Price Close Today : 47.520
Change : 1.562 or 3.4%
Gold Silver Ratio Today : 32.21
Change : -0.786 or -2.4%
Silver Gold Ratio Today : 0.03104
Change : 0.000739 or 2.4%
Platinum Price Close Today : 1841.20
Change : 18.20 or 1.0%
Palladium Price Close Today : 776.50
Change : 11.50 or 1.5%
S&P 500 : 1,375.13
Change : 1.47 or 0.1%
Dow In GOLD$ : $171.84
Change : $ (1.12) or -0.6%
Dow in GOLD oz : 8.313
Change : -0.054 or -0.6%
Dow in SILVER oz : 267.79
Change : -8.35 or -3.0%
Dow Industrial : 12,725.40
Change : 34.44 or 0.3%
US Dollar Index : 73.12
Change : -0.404 or -0.5%
KMG Gold Recycling
Sorry I sent no commentary yesterday, but I was finishing my monthly Moneychanger newsletter for paid subscribers, who can log in to www.the-moneychanger.com and pick up the April issue.
Listening to Ben Bernanke today quoted from his press conference yesterday, I was amazed how incompetent he sounded, stuttering like someone telling an uncertain lie. If he's the best the central bankers have, their gunwales are deeper under water than I even I suspected.
He announced yesterday that his imagination has been surgically removed. At least, that is MY turn on his idiotically continuing the Keynesian nostrums that have so long and with such historical uniformity failed. Poor boy doesn't have imagination enough to think of anything else. What a punishment, to be subjected to a goof like that!
The US DOLLAR, taking its cue from Bernanke's announcement yesterday that he would surely keep interest rates low and thereby assuring he would keep on inflating, sank like a lump in a churn. Y'all remember that more than any other factor, interest rates determine currency exchange rates. Euro managers raise euro interest rates, Bernancubus suppresses dollar interest rates, and surprise, surprise, the scrofulous buck sinks against the scabrous euro. It's the Clash of the Midgets, seeing who can slither down the drain first.
Whooo. That felt good. Now, back to the buck.
Today the US dollar index sank another 40.4 basis points (0.52%) on top of the 53 basis points it threw away yesterday. Trading now at 73.115 on its way to 40 [sic]. Get this: Bernard O'Bama and the Bernanculus are gutting your dollars to please their masters and keep the parasitism dribbling along a while longer. If that don't make you howling mad, you have no mad gland.
Euro rose like your mama's house guest sitting on a whoopee cushion (I bet you got one memorable whipping for that!). New high for the move at 1.4817 Yen rose 0.8% to Y81.54/$ (122.64c/Y100).
Let me put this stock thing in perspective for y'all. Stocks are now maybe 20% above December 2010, yet against gold they have actually dropped. Against silver they have dropped a lot, down to 90% of their June 2003 peak value. Y'all see now? I don't want your stocks, because they are like those smoke bombs they sell for July 4th -- all smoke and noise, no bang. In fact, stocks remain the government-approved, OSHA-safe imitation cherry bomb in Tennessee Bob's Wholesale Fireworks Investment Store. And will remain.
KMG Gold Recycling
Today the Dow rose 34.44 to 12,725.40, hand in hand with the S&P500 which didn't exactly rise, but, well, barely lifted itself up on the ball of its foot 1.47 points to 1,357.13. Oddly -- he always says that when he sniffs blood somewhere -- all the other indices fell. That's confusion, and confusion doesn’t make for strong markets.
I know some of y'all are going to get madder than a wet wasp, but I have to flip the switch on the caution light on SILVER and GOLD PRICES. After the Bernancubus glued the accelerator pedal to the floor yesterday, silver and gold prices took off wildly. But bear in mind that it is not unusual for the SILVER PRICE to top one day, then the GOLD PRICE to top a few days later. Key is that the Gold/Silver ratio, after a new low 25 April at 31.996, shot up to 33.36 the next day. In all silver and gold's recent upside downs, that hasn't happened. But maybe I am only nervously anticipating when I ought to be contentedly enjoying. Still, a live dog is better than a dead lion.
Today the gold price made a new intraday high at $1,538.30 and a new closing high (all-time since the beginning of the cosmos) at $1,530.80, up $14.20 on Comex. Low came at $1,524.10. In the aftermarket gold's playing footsie with $1,536.
Only target I have to work off is that upside down head and shoulders gold broke out of. That points to $1,525 - $1,557. The gold price would have to close below $1,505 to invalidate this rally.
Ohhh, I HATE parabolas, and silver's chart clearly shows one. They are rally killers, and on this drive the silver price will need every sinew and ounce of strength to burst through that historic brick wall at 5000c per ounce. If it does, it will run straight skyward.
Yet -- O, absolve me, Silver Bugs! -- I had rather capture my silver profits now by swapping silver for gold and miss part of that move, than see the reaction take them all away. Swapping for gold, I will at least get to swap back for MORE silver when the ratio rises. Not swapping, I will only get to cherish the warm, fuzzy memory of reading all those Internet gurus who convinced me the silver price will reach $100 by next Friday.
KMG Gold Recycling
The SILVER PRICE has a threatening double top, reached Monday and today, at 4982c and 4950c. The silver price must clear 5000c immediately and not fall below 4725c, or succumb to the Kryptonite of fifty bucks. This situation is as full of tension as your cheeks when you suck on to a firehose. Here it shall not remain, but must advance or fall back.
KMG Gold Recycling
KMG Gold Recycling
Gold Price Close Today : 1530.80
Change : 14.20 or 0.9%
Silver Price Close Today : 47.520
Change : 1.562 or 3.4%
Gold Silver Ratio Today : 32.21
Change : -0.786 or -2.4%
Silver Gold Ratio Today : 0.03104
Change : 0.000739 or 2.4%
Platinum Price Close Today : 1841.20
Change : 18.20 or 1.0%
Palladium Price Close Today : 776.50
Change : 11.50 or 1.5%
S&P 500 : 1,375.13
Change : 1.47 or 0.1%
Dow In GOLD$ : $171.84
Change : $ (1.12) or -0.6%
Dow in GOLD oz : 8.313
Change : -0.054 or -0.6%
Dow in SILVER oz : 267.79
Change : -8.35 or -3.0%
Dow Industrial : 12,725.40
Change : 34.44 or 0.3%
US Dollar Index : 73.12
Change : -0.404 or -0.5%
KMG Gold Recycling
Sorry I sent no commentary yesterday, but I was finishing my monthly Moneychanger newsletter for paid subscribers, who can log in to www.the-moneychanger.com and pick up the April issue.
Listening to Ben Bernanke today quoted from his press conference yesterday, I was amazed how incompetent he sounded, stuttering like someone telling an uncertain lie. If he's the best the central bankers have, their gunwales are deeper under water than I even I suspected.
He announced yesterday that his imagination has been surgically removed. At least, that is MY turn on his idiotically continuing the Keynesian nostrums that have so long and with such historical uniformity failed. Poor boy doesn't have imagination enough to think of anything else. What a punishment, to be subjected to a goof like that!
The US DOLLAR, taking its cue from Bernanke's announcement yesterday that he would surely keep interest rates low and thereby assuring he would keep on inflating, sank like a lump in a churn. Y'all remember that more than any other factor, interest rates determine currency exchange rates. Euro managers raise euro interest rates, Bernancubus suppresses dollar interest rates, and surprise, surprise, the scrofulous buck sinks against the scabrous euro. It's the Clash of the Midgets, seeing who can slither down the drain first.
Whooo. That felt good. Now, back to the buck.
Today the US dollar index sank another 40.4 basis points (0.52%) on top of the 53 basis points it threw away yesterday. Trading now at 73.115 on its way to 40 [sic]. Get this: Bernard O'Bama and the Bernanculus are gutting your dollars to please their masters and keep the parasitism dribbling along a while longer. If that don't make you howling mad, you have no mad gland.
Euro rose like your mama's house guest sitting on a whoopee cushion (I bet you got one memorable whipping for that!). New high for the move at 1.4817 Yen rose 0.8% to Y81.54/$ (122.64c/Y100).
Let me put this stock thing in perspective for y'all. Stocks are now maybe 20% above December 2010, yet against gold they have actually dropped. Against silver they have dropped a lot, down to 90% of their June 2003 peak value. Y'all see now? I don't want your stocks, because they are like those smoke bombs they sell for July 4th -- all smoke and noise, no bang. In fact, stocks remain the government-approved, OSHA-safe imitation cherry bomb in Tennessee Bob's Wholesale Fireworks Investment Store. And will remain.
KMG Gold Recycling
Today the Dow rose 34.44 to 12,725.40, hand in hand with the S&P500 which didn't exactly rise, but, well, barely lifted itself up on the ball of its foot 1.47 points to 1,357.13. Oddly -- he always says that when he sniffs blood somewhere -- all the other indices fell. That's confusion, and confusion doesn’t make for strong markets.
I know some of y'all are going to get madder than a wet wasp, but I have to flip the switch on the caution light on SILVER and GOLD PRICES. After the Bernancubus glued the accelerator pedal to the floor yesterday, silver and gold prices took off wildly. But bear in mind that it is not unusual for the SILVER PRICE to top one day, then the GOLD PRICE to top a few days later. Key is that the Gold/Silver ratio, after a new low 25 April at 31.996, shot up to 33.36 the next day. In all silver and gold's recent upside downs, that hasn't happened. But maybe I am only nervously anticipating when I ought to be contentedly enjoying. Still, a live dog is better than a dead lion.
Today the gold price made a new intraday high at $1,538.30 and a new closing high (all-time since the beginning of the cosmos) at $1,530.80, up $14.20 on Comex. Low came at $1,524.10. In the aftermarket gold's playing footsie with $1,536.
Only target I have to work off is that upside down head and shoulders gold broke out of. That points to $1,525 - $1,557. The gold price would have to close below $1,505 to invalidate this rally.
Ohhh, I HATE parabolas, and silver's chart clearly shows one. They are rally killers, and on this drive the silver price will need every sinew and ounce of strength to burst through that historic brick wall at 5000c per ounce. If it does, it will run straight skyward.
Yet -- O, absolve me, Silver Bugs! -- I had rather capture my silver profits now by swapping silver for gold and miss part of that move, than see the reaction take them all away. Swapping for gold, I will at least get to swap back for MORE silver when the ratio rises. Not swapping, I will only get to cherish the warm, fuzzy memory of reading all those Internet gurus who convinced me the silver price will reach $100 by next Friday.
KMG Gold Recycling
The SILVER PRICE has a threatening double top, reached Monday and today, at 4982c and 4950c. The silver price must clear 5000c immediately and not fall below 4725c, or succumb to the Kryptonite of fifty bucks. This situation is as full of tension as your cheeks when you suck on to a firehose. Here it shall not remain, but must advance or fall back.
KMG Gold Recycling
Wednesday, April 27, 2011
Gold and Silver Coins are Money
KMG Gold Recycling
Gold Price Close Today : 1503.00
Change : (5.60) or -0.4%
Silver Price Close Today : 45.050
Change : (2.099) or -4.5%
Gold Silver Ratio Today : 33.36
Change : 1.366 or 4.3%
Silver Gold Ratio Today : 0.02997
Change : -0.001280 or -4.1%
Platinum Price Close Today : 1804.50
Change : -20.10 or -1.1%
Palladium Price Close Today : 751.90
Change : -7.90 or -1.0%
S&P 500 : 1,347.24
Change : 11.99 or 0.9%
Dow In GOLD$ : $173.23
Change : $ 2.24 or 1.3%
Dow in GOLD oz : 8.380
Change : 0.109 or 1.3%
Dow in SILVER oz : 279.59
Change : 14.90 or 5.6%
Dow Industrial : 12,595.37
Change : 115.49 or 0.9%
US Dollar Index : 73.77
Change : -0.231 or -0.3%
It pays always to keep your eyes on the horizon, so that the confusing details around you assemble themselves into a larger picture.
From a friend in Iowa I received an email reporting that a friend had gone to buy a US$7,300 piece of farm equipment. When it came time to pay, his friend asked the dealer, "Do you want paper, silver, or gold?"
The dealer brightened and said, "Silver, and I'll give you a discount if you pay in silver."
Behold, the new economy! Here behold the goal and means to free ourselves of the Federal Reserve's fiat money tyranny and economic slavery: we stop using their phony private money and return to [quite legal and constitutional] gold and silver money. We remove ourselves from the economic storms caused by their rotten currency and crooked banking and we rebuild our local economies on a sound silver and gold basis.
Just try it. Next time you pay, ask the person whether they want paper, gold, or silver. See what happens. Worst they can say is NO.
Also, the ever-sagacious Catherine Austin Fitts and I teamed up to create www.silverandgoldaremoney.com. There you can punch in any US dollar amount and in real time convert that to a payment in US 90% silver coin, US gold or silver American Eagles, or a host of non-US gold and silver coins and bullion.
Next time you hand somebody green paper dollars or a credit card, just remember: you are forging your own chains.
And forget the US government threats and persiflage: you have a constitutional and common law right to contract for any payment you please. More than that, all gold and silver coins ever minted by the US government remain "legal tender." Using gold and silver coin is not "bartering", it's MONEY.
You forge your own chains.
MARKETS TODAY:
We trod not the office steps yesterday, but observed for Easter Monday. Considering yesterday's fireworks, that probably was a great idea.
I know y'all only want to know about silver and gold, but be patient: it all works together.
THE US DOLLAR INDEX has sunk 32.3 basis points since last Thursday, from 74.096 to 73.773. Today alone it lost 21.3 more bp, 0.27%.
Yet look not smugly on. Today the dollar formed a falling wedge, which promises that tomorrow, if it breaks not below 73.744, 'twill rise tomorrow.
And that would surprise. Breaking down past the last low, 73.74, and the December low, 74.23, targets the dollar for 72 or lower. The scabrous euro took advantage of the buck's swoon to rise to another new high for the move (ho-hum) at 1.4643, up 0.77%. Even the yen has gapped up and headed higher. Today it's trading at Y81.55/$ (122.62c/Y100).
Only sign this situation might turn around is that falling wedge on the dollar's daily chart.
Baldly stated, I don't believe the stock market, or more precisely, I DISbelieve the stock market. No economic reason exists for its rise, except the Fed and other central banks pumping out zillions of new money which all runs straight into financial markets. Add to that the Nice Government Men on the Plunge Protection Team steadily meddling in the market, following the Spirit of Potemkin to keep up a cardboard front screening the real and rotten economy.
Today the Dow rose to a new high for the move, 12,595.37, up 115.49. The S&P500 rose 11.99 to 1,347.24.
Hey, here's an idea! Instead of investing your money in stocks, why not take a couple hundred thousand bucks out into your back yard, bury it, and see if a money tree comes up?
There are very few overnight certainties in markets, but it appears that yesterday silver turned down, and gold will probably break as well.
The SILVER PRICE sank 10.5% from its 4985 high Monday to a 4464.7c low. One expects to see that sort of move on a trend reversing day.
I hasten to add that this is no certainty, as every forecast dwells in a foggy nimbus. But a quick calculation shows that if this is the break, then the target might be 3360.
Y'all must bear in mind that the more overhyped and overblown a market becomes, the more severe the following reaction. Every hedge fund in the world has hopped on to silver, and they have almost as much loyalty as a 1915 Irish draftee in the British army. They will dump silver by the truckloads as soon as they sniff a break.
The naďve think this is terrible, that the bull market has ended, that it proves silver is in a bubble. Nothing could be further from the truth. It is a normal process in every market, and clears away the grotesque over-optimism to make way for another advance.
Biggest argument AGAINST a correction in precious metals remains GOLD. It sank a paltry $5.60 today to close Comex at $1,503.00, but that offered no damage. The SILVER PRICE on the other hand fell 209.9c to 4505c, down 4.5% in one day. The gold/silver ratio fell 4.26%, too.
Once the gold price crosses that $1,500 wall protecting investor morale, it will tumble, too. Target there might be $1,445.
On the upside, the silver price needs to close over 5000c and gold above $1,525 to suggest that this rally hath yet legs.
On this day in 1983 the Dow Jones Industrial Average broke 1,200 for the first time. I recount that incident to impress upon y'all's minds how far markets can outrun our imagination. The ultimate Dow High was 11,722, about ten times that 1983 figure.
In Florida and Georgia today is Confederate Memorial Day. It was yesterday in Mississippi.
Argentum et aurum comparenda sunt -- -- Gold and silver must be bought. KMG Gold Recycling
Gold Price Close Today : 1503.00
Change : (5.60) or -0.4%
Silver Price Close Today : 45.050
Change : (2.099) or -4.5%
Gold Silver Ratio Today : 33.36
Change : 1.366 or 4.3%
Silver Gold Ratio Today : 0.02997
Change : -0.001280 or -4.1%
Platinum Price Close Today : 1804.50
Change : -20.10 or -1.1%
Palladium Price Close Today : 751.90
Change : -7.90 or -1.0%
S&P 500 : 1,347.24
Change : 11.99 or 0.9%
Dow In GOLD$ : $173.23
Change : $ 2.24 or 1.3%
Dow in GOLD oz : 8.380
Change : 0.109 or 1.3%
Dow in SILVER oz : 279.59
Change : 14.90 or 5.6%
Dow Industrial : 12,595.37
Change : 115.49 or 0.9%
US Dollar Index : 73.77
Change : -0.231 or -0.3%
It pays always to keep your eyes on the horizon, so that the confusing details around you assemble themselves into a larger picture.
From a friend in Iowa I received an email reporting that a friend had gone to buy a US$7,300 piece of farm equipment. When it came time to pay, his friend asked the dealer, "Do you want paper, silver, or gold?"
The dealer brightened and said, "Silver, and I'll give you a discount if you pay in silver."
Behold, the new economy! Here behold the goal and means to free ourselves of the Federal Reserve's fiat money tyranny and economic slavery: we stop using their phony private money and return to [quite legal and constitutional] gold and silver money. We remove ourselves from the economic storms caused by their rotten currency and crooked banking and we rebuild our local economies on a sound silver and gold basis.
Just try it. Next time you pay, ask the person whether they want paper, gold, or silver. See what happens. Worst they can say is NO.
Also, the ever-sagacious Catherine Austin Fitts and I teamed up to create www.silverandgoldaremoney.com. There you can punch in any US dollar amount and in real time convert that to a payment in US 90% silver coin, US gold or silver American Eagles, or a host of non-US gold and silver coins and bullion.
Next time you hand somebody green paper dollars or a credit card, just remember: you are forging your own chains.
And forget the US government threats and persiflage: you have a constitutional and common law right to contract for any payment you please. More than that, all gold and silver coins ever minted by the US government remain "legal tender." Using gold and silver coin is not "bartering", it's MONEY.
You forge your own chains.
MARKETS TODAY:
We trod not the office steps yesterday, but observed for Easter Monday. Considering yesterday's fireworks, that probably was a great idea.
I know y'all only want to know about silver and gold, but be patient: it all works together.
THE US DOLLAR INDEX has sunk 32.3 basis points since last Thursday, from 74.096 to 73.773. Today alone it lost 21.3 more bp, 0.27%.
Yet look not smugly on. Today the dollar formed a falling wedge, which promises that tomorrow, if it breaks not below 73.744, 'twill rise tomorrow.
And that would surprise. Breaking down past the last low, 73.74, and the December low, 74.23, targets the dollar for 72 or lower. The scabrous euro took advantage of the buck's swoon to rise to another new high for the move (ho-hum) at 1.4643, up 0.77%. Even the yen has gapped up and headed higher. Today it's trading at Y81.55/$ (122.62c/Y100).
Only sign this situation might turn around is that falling wedge on the dollar's daily chart.
Baldly stated, I don't believe the stock market, or more precisely, I DISbelieve the stock market. No economic reason exists for its rise, except the Fed and other central banks pumping out zillions of new money which all runs straight into financial markets. Add to that the Nice Government Men on the Plunge Protection Team steadily meddling in the market, following the Spirit of Potemkin to keep up a cardboard front screening the real and rotten economy.
Today the Dow rose to a new high for the move, 12,595.37, up 115.49. The S&P500 rose 11.99 to 1,347.24.
Hey, here's an idea! Instead of investing your money in stocks, why not take a couple hundred thousand bucks out into your back yard, bury it, and see if a money tree comes up?
There are very few overnight certainties in markets, but it appears that yesterday silver turned down, and gold will probably break as well.
The SILVER PRICE sank 10.5% from its 4985 high Monday to a 4464.7c low. One expects to see that sort of move on a trend reversing day.
I hasten to add that this is no certainty, as every forecast dwells in a foggy nimbus. But a quick calculation shows that if this is the break, then the target might be 3360.
Y'all must bear in mind that the more overhyped and overblown a market becomes, the more severe the following reaction. Every hedge fund in the world has hopped on to silver, and they have almost as much loyalty as a 1915 Irish draftee in the British army. They will dump silver by the truckloads as soon as they sniff a break.
The naďve think this is terrible, that the bull market has ended, that it proves silver is in a bubble. Nothing could be further from the truth. It is a normal process in every market, and clears away the grotesque over-optimism to make way for another advance.
Biggest argument AGAINST a correction in precious metals remains GOLD. It sank a paltry $5.60 today to close Comex at $1,503.00, but that offered no damage. The SILVER PRICE on the other hand fell 209.9c to 4505c, down 4.5% in one day. The gold/silver ratio fell 4.26%, too.
Once the gold price crosses that $1,500 wall protecting investor morale, it will tumble, too. Target there might be $1,445.
On the upside, the silver price needs to close over 5000c and gold above $1,525 to suggest that this rally hath yet legs.
On this day in 1983 the Dow Jones Industrial Average broke 1,200 for the first time. I recount that incident to impress upon y'all's minds how far markets can outrun our imagination. The ultimate Dow High was 11,722, about ten times that 1983 figure.
In Florida and Georgia today is Confederate Memorial Day. It was yesterday in Mississippi.
Argentum et aurum comparenda sunt -- -- Gold and silver must be bought. KMG Gold Recycling
Wednesday, April 20, 2011
Goldman Attempts To Answer The $2.9 Trillion Question: "What Happens When The Fed Stops Buying?"
Goldman's just released look at what the end of QE2 would mean should certainly be taken with a grain of salt: after all lately (and in general), the firm's sellside recommendations traditionally are a gateway for its own prop traders to take the other side of what its clients are doing (observe recent performance in WTI). That said, probably the most insightful piece of data is that we now know what the upcoming Greece bankruptcy will be called in polite circles: wait for it - a "liability management exercise." KMG Gold Recycling
As for the overall impact on rates, Goldman is not surprisingly bearish on rates, and sees the bulk of the upcoming weakness as focused on the 5 Year point. Franceso Garzarelli summarizes his view as follows: "together with our forecast of above-trend growth in coming quarters and the idea that the compression of bond premium will decay as the Fed’s balance sheet (organically or voluntarily) shrinks, we think that short positions in 5-yr Treasuries remain attractive." In other words, Goldman is expecting some flattening in the short end.
Does that mean a steepening is inevitable. As for the broader perspective on the curve, Goldman says: "assuming the Fed’s bond holdings passively run off as securities mature, the bond premium should gradually rise. And our macro forecasts are consistent with higher real rates in coming quarters." In other words, another extremely non-committal report from a firm that is rapidly losing its Master of the Universe status. Key highlights below.
As for the overall impact on rates, Goldman is not surprisingly bearish on rates, and sees the bulk of the upcoming weakness as focused on the 5 Year point. Franceso Garzarelli summarizes his view as follows: "together with our forecast of above-trend growth in coming quarters and the idea that the compression of bond premium will decay as the Fed’s balance sheet (organically or voluntarily) shrinks, we think that short positions in 5-yr Treasuries remain attractive." In other words, Goldman is expecting some flattening in the short end.
Does that mean a steepening is inevitable. As for the broader perspective on the curve, Goldman says: "assuming the Fed’s bond holdings passively run off as securities mature, the bond premium should gradually rise. And our macro forecasts are consistent with higher real rates in coming quarters." In other words, another extremely non-committal report from a firm that is rapidly losing its Master of the Universe status. Key highlights below.
- Concerns that a combination of higher energy prices and fiscal tightening will dent growth have supported global bonds. These concerns are overstated, in our view. Meanwhile, core inflation has turned (admittedly from low levels), and more European central banks are likely to follow in the ECB’s footsteps and tighten policy over the coming months.
- Our estimates indicate that ‘QE2’ could have shaved as much as 40-50bp off intermediate US bond yields. The effect of purchases is most visible in the 5-yr sector of the Treasury curve, which continues to look ‘rich’ relative to 2s and 10s.
- When the flow of purchases ends in June, there should be little immediate effect on bond yields—provided expectations are that the Fed will not sell securities back into the market any time soon.
- However, even assuming the Fed’s bond holdings passively run off as securities mature, the bond premium should gradually rise. And our macro forecasts are consistent with higher real rates in coming quarters.
- In Euroland, Portugal formally requested conditional financial support and talk of a liability management exercise on Greek sovereign debt has intensified. Although the latter could lead to bouts of risk aversion, we continue to expect further spread compression between the larger ‘non-core’ issuers (i.e., Spain, Italy and Belgium) and Germany/France.
And the full report:
What Happens After the Fed Stops Buying?
The Fed’s QE2 program could be keeping intermediate maturity US Treasury yields around 40-50bp lower than would otherwise be the case. The effects of the central bank’s purchase are most visible in the 5-yr sector of the yield curve, which still looks ‘rich’ relative to adjacent maturities. When the flow of purchases ends in June, and on the assumption that the stock of bonds held by the Fed does not change, there should be little immediate effect on bond yields. Nonetheless, the ‘term premium’ should gradually rise as the Fed’s bond holdings passively run off as securities mature. Moreover, expectations of the Fed selling securities back into the market—which is not our baseline case but could admittedly pick up as the economy continues to recover—could amplify the increase in yields we expect based on our macro forecasts.
Fed’s Bond Purchases Soon Drawing to an End
Through its asset purchase program (‘QE2’), the Fed has delivered a stimulus to the economy by-passing the nominal zero policy rate constraint and influencing directly longer-dated discount factors. In the December issue of our Fixed Income Monthly, we estimated the Fed had broadly succeeded in bringing intermediate and long Treasury yields close to a level consistent with negative policy rates as implied by a ‘Taylor Rule’.
As the purchase program draws to an end in June, we are frequently asked whether there will be an adverse impact on the bond market. We tackle this issue with an ad hoc regression analysis, cross-checking our findings through the suite of valuation tools we regularly employ in the formulation of bond strategy.
Our main conclusion is that the announcement of the total size of Treasury purchases, rather than their implementation, could have lowered intermediate maturity Treasury yields by as much as 40-50bp. As long as the Fed does not announce its intention to sell bonds back into the market any time soon (which continues to be our baseline case), this effect is likely to fade only gradually, assuming no intervening change in the macro landscape.
Our central forecasts, however, are consistent with a progressive increase in real bond yields over coming quarters. And, as the recovery takes hold, it is conceivable that market participants’ expectation of asset sales could increase, thus amplifying the sell-off in yields. With this in mind, we continue to recommend short positions in the 5-yr area of the Treasury curve, which looks to have been the most influenced by the Fed’s interventions.
The ‘Announcement Effect’
Assuming financial markets are liquid and forward-looking, bond prices should be affected by the announced total amount of purchases the central bank intends to conduct, rather than the subsequent flow of purchases. Chairman Bernanke has been among the proponents of this approach, which researchers often refer to as the ‘portfolio balance channel’ or the ‘stock view’.
If this theory is correct, when the flow of purchases is discontinued there should be little effect on yields provided expectations are that the Fed will not sell securities back into the market any time soon.
Empirical evidence appears to support the notion that the ‘stock’ effect dominates the ‘flow’. For example, 10-year US Treasury yields fell sharply following the surprise announcement of the ‘QE1’ program on November 25, 2008 and March 18, 2009. However, there is little evidence that yields increased following the termination of those purchases at the end of October 2009 (when the Fed stopped buying
Treasuries) and March 2010 (the end of the mortgage-backed security purchase program).
The chart at the bottom of the previous page compares actual 10-yr US Treasury yields with the ‘fair value’ implied by our Bond Sudoku model. The latter describes US bond yields as a function of 1-yr-ahead consensus expectations on short rates, real GDP growth and CPI inflation, both domestically and in the other major advanced economies. The effects of the asset purchase program (or shifts in the net supply of government bonds) are captured by the model only indirectly, i.e., to the extent that these influence expectations on the future course of the relevant macro factors.
As can be seen, ‘QE1’ led to a fairly rapid move in bond yields right on the announcement date. In the case of ‘QE2’, the effect largely preceded the FOMC meeting in which the decision was taken. This can be attributed to the fact that, in a number of speeches through the Summer, Fed officials had hinted at a resumption of bond purchases to stimulate the economy.
By the time the Fed announced the intention to further expand its balance sheet on November 3, 2010, 10-yr government bonds were already trading around 1 standard deviation (or roughly 40bp) below their macro equilibrium. Our GS Curve model—which links the term structure of constant maturity Treasury yields to consensus macro expectations at different horizons—indicates that around the same period bond yields in the 5-to-7-yr maturity range (the main target area of purchases) stood at very depressed levels relative to their historical relation with the 2-yr and 10-yr sectors (see chart below).
Once again, most of the effect precedes the actual decision to conduct asset purchases, but expectations of such an outcome had been building ahead of the FOMC meeting. A parallel can be drawn to the Fed’s decision to cut policy rates to 1% on June 25, 2003. Intermediate maturity bonds rallied strongly in the 3 months before the policy meeting, only to sell off aggressively after the event.
Fed Holdings Keep Bond Premium Lower
In order to test the empirical validity of the ‘stock view’ more formally, in previous research Jari Stehn ran a regression between the nominal 10-year US Treasury yield against four factors: the stock of announced purchases, the actual weekly flow of these purchases, a number of economic variables (including payrolls, the ISM survey and the University of Michigan/Reuters 5-10 year inflation expectations) and measures of the Fed’s other unconventional monetary policies (such as its guidance that it would keep interest rates “exceptionally low for an extended period”). The results, summarised in the first column of the table above, indicate that the effect of the announced stock of purchases is negative and statistically highly significant.
One issue with this simple specification is that the coefficient on the flow of purchases takes the ‘wrong’ sign, suggesting that the flow of purchases raised bond yields. This counterintuitive finding has a simple explanation: just about as the Fed started to purchase assets last November, bond yields rose sharply because growth expectations improved and, partly as a result of this, market participants revised down their expectations of further easing. But because the statistical exercise controls for the contemporaneous rather than the expected macroeconomic landscape, the increase in yields is attributed to the flow of QE2 purchases.
To address this shortcoming, rather than focusing just on the 10-year yield, we explore how the Fed’s purchase program has affected the yield curve across maturities. This allows a differentiation between the impact of economic factors (which affect the entire term structure) and the Fed purchases (which could differ by maturity bucket). Making use of the relative movement of yields at different maturities provides more information and should therefore provide better identification.
The Box above outlines the approach we have taken and the main results are summarised in the second column of the table on the previous page. Once again we find a significantly negative and economically meaningful effect from the stock of purchases on the 2-10-year part of the yield curve, while the coefficient associated with flows is now insignificant. Specifically, the estimates suggest that yields in the 2-10-year maturity range have been reduced by around half a basis point for each US$1bn of announced purchases. This suggests that the Fed’s Treasury holdings could be currently holding down 10-year yields to the tune of 40-50bp. This numerical result is clearly subject to the usual caveats applicable to the outcome of statistical analysis, but is reassuringly not far from what other studies have found. In addition, similar regression analysis on 10-year yields for the UK also found a significant and meaningful effect from the stock of purchases but not from the flow of purchases (for more details, see “A Modest Impact on Markets from the End of QE2” Global Economics Weekly 11/14).
To Sell, Or Not to Sell?
The empirical analysis reviewed so far allows us to draw the following conclusions for bond strategy:
- The starting point for 10-yr US Treasury yields is not far from a notion of ‘fair value’ consistent with the historical relationship to the current set of consensus expectations on macroeconomic factors. Going by this result, longer-dated US nominal bond yields are not abnormally low relative to where the average investor expects the economy to be heading. Rather, they do not incorporate the additional premium that is typically in place when the monetary policy stimulus is at full throttle.
- Expectations on what the Fed will do with its bond portfolio—hold on to securities until maturity or sell them beforehand—matters more than the distribution of flows. So, whether purchases are tapered off or ended on schedule should have little effect on bond yields. Put differently, no ‘cliff effect’ should be expected at the end of June.
- Our central view continues to be that the Fed will not announce asset sales for a long time to come. That said, even assuming the Fed’s bond holdings passively run off as securities mature, the term premium compression we have identified through our empirical work should gradually decay. Moreover, as the economy continues to expand along our baseline forecasts, it is plausible to think that investors’ expectations could shift towards assigning a larger probability to asset sales. This would amplify the underlying tendency for bond yields to rise.
- According to our GS-Curve calculations, the 5-yr sector of the Treasury curve has not completely realigned itself to its historical relationship with shorter- and longer-maturity bonds, conditional on consensus views on how the US economy will perform over different time horizons. In light of this observation, together with our forecast of above-trend growth in coming quarters and the idea that the compression of bond premium will decay as the Fed’s balance sheet (organically or voluntarily) shrinks, we think that short positions in 5-yr Treasuries remain attractive.
Wednesday, April 20, 2011
The One Press Release That The S&P Will Never Issue
It took less than 48 hours for the market to completely shrug off S&P's warning about America's credit rating, even as the dollar: that prima facie indicator of US stability and viability, has just hit a fresh 16 month low. And while nothing anyone says has much of a chance to impact the market, which continues to move with a negative 1 correlation to the now default carry funding currency, the following is the press release that S&P should issue if it wants to truly bring attention to the US debt crisis.
NEW YORK (Standard & Poor's) April 22, 2011--Standard & Poor's Ratings Services said today that it initiated ratings on the debt issues of the Federal Reserve System (commonly referred to as U.S. dollars) with a AAA/Negative Outlook.
We derive our opinion from the observation that the Federal Reserve’s assets consist of roughly $2.5 trillion of government debt with a deteriorating outlook against $52 billion in capital, thus yielding a leverage ratio of 48x.
In addition to its highly leveraged exposure to a deteriorating credit (the United States of America), the Federal Reserve’s stated strategy is to sell these securities back into the market (as a means of tightening policy). In the event of future downgrades of the U.S., these securities are likely to generate losses in multiples of existing capital.
The Federal Reserve intends to handle said losses via a ‘negative liability’ account, which makes them the liability of the United States of America. This creates a very clear event horizon, or point of no return: downgrades of U.S. government debt generate substantial losses on Federal Reserve’s balance sheet, which then make the U.S. government’s debt larger than it was before the downgrade, thus creating a vortex of deteriorating credit.
If we were to lower the ratings on the U.S., we would also lower the ratings on the debt of the Federal Reserve, as well as our issuer credit ratings on all other individual GRE entities.
NEW YORK (Standard & Poor's) April 22, 2011--Standard & Poor's Ratings Services said today that it initiated ratings on the debt issues of the Federal Reserve System (commonly referred to as U.S. dollars) with a AAA/Negative Outlook.
We derive our opinion from the observation that the Federal Reserve’s assets consist of roughly $2.5 trillion of government debt with a deteriorating outlook against $52 billion in capital, thus yielding a leverage ratio of 48x.
In addition to its highly leveraged exposure to a deteriorating credit (the United States of America), the Federal Reserve’s stated strategy is to sell these securities back into the market (as a means of tightening policy). In the event of future downgrades of the U.S., these securities are likely to generate losses in multiples of existing capital.
The Federal Reserve intends to handle said losses via a ‘negative liability’ account, which makes them the liability of the United States of America. This creates a very clear event horizon, or point of no return: downgrades of U.S. government debt generate substantial losses on Federal Reserve’s balance sheet, which then make the U.S. government’s debt larger than it was before the downgrade, thus creating a vortex of deteriorating credit.
If we were to lower the ratings on the U.S., we would also lower the ratings on the debt of the Federal Reserve, as well as our issuer credit ratings on all other individual GRE entities.
Tuesday, April 19, 2011
$5000 Gold and $300 Silver Are Credible Numbers
Q: What do CNBC, George Soros, Warren Buffet and every other mainstream investment commentator on the price of gold have in common for the last ten years?
A: They are all wrong. All the time, every year, ten out of ten years in a row.
If you continue to pay attention to such disinformation, you will lose money. Definitely. No question. Guaranteed. Each and every year, their vapid comments on the future gold price prove to be complete bollocks, yet year after year, and day after day, millions of readers watchers and listeners tune in for another dose of horribly incorrect information.
These days, the number of perpetually inaccurate predictions forecasting an end to the gold boom are thoroughly drowned out by the now multitudinous voices screaming from the rooftops for gold to go much higher. About 90 percent of that is the herd mentality at work. Early predictions for $1,000 gold, which seemed extreme and outlandish just two years ago, turned out to be very conservative. So its easy now to lay claim to being “the one who predicted the gold bull market”. Bandwagon riders aside, there are compelling reasons to support a much higher gold price, and more importantly, a narrowing of the ratio between the gold price and the silver price. One year ago, the silver to gold ratio was 63 ounces of silver for every ounce of gold. Today that ratio is 35:1. Its fallen by nearly half in one year.
In terms of pure performance, whereas gold has delivered a solid gain of 26.51% in the course of the last year, silver has outshone gold spectacularly, turning in a gain of 123.55%, making it the commodity trade of the year by far. The effect of that performance is to dramatically alter the perception of investors in terms of its desirability as a precious metal. Its long been a psychological barrier to silver’s progress, in my opinion, that a precious metal could be had so cheap.
But as the prices of both monetary metals grows, and their price differentials narrow, investors want an idea of where the future is heading in terms of these prices. Can they continue to grow so dramatically in price, or is there a point at which their price appreciation curve will level out and become more incremental? Or, is there a point at this the upward price curves will plunge steeply downward? And at what point, if every, will the price curves of silver and gold converge? What exactly is the appropriate ratio of gold versus silver? Do we buy bullion, coins, ETF’s, Gold Funds, Senior Miners or Junior Explorers? Which is safest? Which is riskiest? First lets consider the ratio question. If the ratio suggested in the title were to become reality, that would mean a ratio of only ten ounces of silver to buy one ounce of gold.
If the ratio curve were to continue climbing in favour silver at the present rate, it would approach 10:1 within another year. But if the ratio were to reflect numbers pegged to certain fundamental realities, then perhaps we could deduce a more rational price differential with better certainty. According to John Stephenson’s Little Book of Commodity Investing, there is 16 times more silver in the earth’s crust than gold. So on that basis alone, the correct price ratio is arguably 16:1. Silver bulls like to point out that silver is unique among monetary metals because of its wide ranging industrial applications, as well as in photography and jewelry.
As the silver price continues to consolidate its price differential with gold, it is likely that process modification and substitution will occur wherever possible in the manufacturing supply chain to replace silver, which will dampen industrial demand. Thanks to silver’s unique chemical attributes, however, that effect will be muted. 2009 statistics from the Silver Institute show that global supply of silver was more or less equal to the global demand for silver from all classes including manufacturing and bullion minting. Government stocks of silver are estimated to have fallen by 13.7 million ounces over the course of 2009, to reach their lowest levels in more than a decade. Russia again accounted for the bulk of government sales, with China and India essentially absent from the market in 2009.
Regarding China, Gold Fields Mineral Services states that after years of heavy sales, its silver stocks have been reduced significantly. If the silver ratio is heading to 16:1, that implies a near term price range of $90 – $100 per ounce. If gold goes to $5,000 an ounce, and the silver/gold price ratio remains 16:1, there’s silver at $312.50 per ounce. And what, pray tell, is coming down the pike to support a gold price of $5,000? First and foremost, the United States dollar.
The whole global financial system is trapped in a situation whereby we have no choice but to permit the United States to continue counterfeiting money. There is no single political force or voice or even prospect with the knowledge and the power to put a stop to the insanity into which we continue to spiral on a daily basis. That means, despite the unanimous chorus from the financial media mainstream, which anesthetizes the human race in an effort to thwart violent protest by design, the fabrication of electronic dollars will continue apace. For years. In terms of strict nominal value, that implies a proportional increase in the prices of, well, everything. Inflation is the direct outcome of monetary expansion in the absence of economic growth. Therefore, gold and silver will be direct beneficiaries of such policy.
At the same time, sovereign and large capital pool (LCP) investors in U.S. debt are seeking to exit their holdings of U.S. dollars, The world’s largest bond fund, PIMCO, and its acerbic chief Bill Gross, are now shorting the U.S. dollar. China has stated repeatedly that it will reduce its holdings of U.S. debt. This is sending a signal to the rest of the sovereign wealth and LCPs that the U.S. dollar should be abandoned. That means, when the convulsions that seize the global financial system, such as that of 2008, manifest themselves, investors will flee less and less to the U.S. dollar, and more and more to other currencies – especially gold and silver. So not only does the price of gold appreciate in strictly nominal terms, but demand for it is growing even as it grows exponentially in price.
That’s why, given this illogical yet nevertheless existing stupidity, the more expensive gold and silver get, the greater will be their demand as a replacement for U.S. dollar denominated safe haven asset classes. The third major factor that is going to drive gold to $5,000 and silver through $300 is related to the first two. Governments, always reactive and never proactive, will eventually start to ratify gold and silver as official currency alternatives as a result of public pressure. The decision by the people of Utah to do just that was big news recently, even though technically and legally, it always was legal tender in that state. It is this final legitimizing step by regional governments that will open the eyes of the otherwise hypnotized American public.
For now, the move is painted as fringe by the idiotic mainstream, who are unwitting pawns for the financial services industry – U.S. Federal Reserve – U.S. Treasury trio of economic under-miners. But contrary to global public perception, this has been a recurring theme in the United States economy, pretty much from day 1. The Daily Astorian, a newspaper of the day in Astoria, Oregon, on May 9th, 1876 published a story the following of which is an excerpt: The people of this country are tolerably familiar with depreciated money.
The great mass of them have had nothing else for the last fourteen years. We are accustomed to depreciated Greenbacks, National Bank Notes, Nickels and Silver, and there are those living who can recall the time when Gold was worth less than Silver. The biggest perpetrators of what we, the people, must soon designate as criminals, else suffer the continuing consequences of no jobs and no future, are the United States Federal Reserve, the United States Treasury, The Commodities and Futures Trading Commission, and the Securities Exchange Commission. “Oh but wait,” say some. “The United States Federal Reserve is not a government body….its private.” And? The Federal Reserve is nothing more and nothing less than the off-balance sheet entity of the U.S. Treasury that permits the illegal fabrication of dollars out of thin air without prosecution.
Of course this off-balance sheet entity is not an official government body. It was designed that way, exactly as Enron set up LJM L.P., to hide losses and perform sundry distasteful and illegal acts in an effort to support its parent entity. When an entity is formed specifically to operate outside of the publicly elected offices of government, but is given dominion over the most important property of the voting public – its money – and when that entity acts in direct opposition to the interests of the public to whom it owes a fiduciary duty, then its status as government or private really becomes irrelevant. All that matters in terms of its identity is its treasonous and fraudulent activity.
The management of Enron went to jail for their larcenous culture of hiding from shareholders the true extent of their losses, and the illegal nature of their everyday operations. With a bit of luck and perseverance, the same fate will yet befall Bernanke, Paulson, Summers, Rubin, Geithner, Gensler, Shapiro and the rest of the Ivy league thieves. In the meantime, the best defense against their intentional destruction of the United States currency is selling dollars to buy gold for capital preservation and silver for low-risk capital appreciation.
The day will come when, instead of teaching that these leaders were nobly trying to ease the pain of financial forces beyond their control, today’s politicians will instead be accurately portrayed as naďve, negligent, and just plain stupid populists whose ignorance of real economic matters was exactly the ingredient necessary to permit the psychopathic and misanthropic banking community to form the financial policies of their governments. Unfortunately, the only ones likely to be alive by the time that happens are now in diapers.
A: They are all wrong. All the time, every year, ten out of ten years in a row.
If you continue to pay attention to such disinformation, you will lose money. Definitely. No question. Guaranteed. Each and every year, their vapid comments on the future gold price prove to be complete bollocks, yet year after year, and day after day, millions of readers watchers and listeners tune in for another dose of horribly incorrect information.
These days, the number of perpetually inaccurate predictions forecasting an end to the gold boom are thoroughly drowned out by the now multitudinous voices screaming from the rooftops for gold to go much higher. About 90 percent of that is the herd mentality at work. Early predictions for $1,000 gold, which seemed extreme and outlandish just two years ago, turned out to be very conservative. So its easy now to lay claim to being “the one who predicted the gold bull market”. Bandwagon riders aside, there are compelling reasons to support a much higher gold price, and more importantly, a narrowing of the ratio between the gold price and the silver price. One year ago, the silver to gold ratio was 63 ounces of silver for every ounce of gold. Today that ratio is 35:1. Its fallen by nearly half in one year.
In terms of pure performance, whereas gold has delivered a solid gain of 26.51% in the course of the last year, silver has outshone gold spectacularly, turning in a gain of 123.55%, making it the commodity trade of the year by far. The effect of that performance is to dramatically alter the perception of investors in terms of its desirability as a precious metal. Its long been a psychological barrier to silver’s progress, in my opinion, that a precious metal could be had so cheap.
But as the prices of both monetary metals grows, and their price differentials narrow, investors want an idea of where the future is heading in terms of these prices. Can they continue to grow so dramatically in price, or is there a point at which their price appreciation curve will level out and become more incremental? Or, is there a point at this the upward price curves will plunge steeply downward? And at what point, if every, will the price curves of silver and gold converge? What exactly is the appropriate ratio of gold versus silver? Do we buy bullion, coins, ETF’s, Gold Funds, Senior Miners or Junior Explorers? Which is safest? Which is riskiest? First lets consider the ratio question. If the ratio suggested in the title were to become reality, that would mean a ratio of only ten ounces of silver to buy one ounce of gold.
If the ratio curve were to continue climbing in favour silver at the present rate, it would approach 10:1 within another year. But if the ratio were to reflect numbers pegged to certain fundamental realities, then perhaps we could deduce a more rational price differential with better certainty. According to John Stephenson’s Little Book of Commodity Investing, there is 16 times more silver in the earth’s crust than gold. So on that basis alone, the correct price ratio is arguably 16:1. Silver bulls like to point out that silver is unique among monetary metals because of its wide ranging industrial applications, as well as in photography and jewelry.
As the silver price continues to consolidate its price differential with gold, it is likely that process modification and substitution will occur wherever possible in the manufacturing supply chain to replace silver, which will dampen industrial demand. Thanks to silver’s unique chemical attributes, however, that effect will be muted. 2009 statistics from the Silver Institute show that global supply of silver was more or less equal to the global demand for silver from all classes including manufacturing and bullion minting. Government stocks of silver are estimated to have fallen by 13.7 million ounces over the course of 2009, to reach their lowest levels in more than a decade. Russia again accounted for the bulk of government sales, with China and India essentially absent from the market in 2009.
Regarding China, Gold Fields Mineral Services states that after years of heavy sales, its silver stocks have been reduced significantly. If the silver ratio is heading to 16:1, that implies a near term price range of $90 – $100 per ounce. If gold goes to $5,000 an ounce, and the silver/gold price ratio remains 16:1, there’s silver at $312.50 per ounce. And what, pray tell, is coming down the pike to support a gold price of $5,000? First and foremost, the United States dollar.
The whole global financial system is trapped in a situation whereby we have no choice but to permit the United States to continue counterfeiting money. There is no single political force or voice or even prospect with the knowledge and the power to put a stop to the insanity into which we continue to spiral on a daily basis. That means, despite the unanimous chorus from the financial media mainstream, which anesthetizes the human race in an effort to thwart violent protest by design, the fabrication of electronic dollars will continue apace. For years. In terms of strict nominal value, that implies a proportional increase in the prices of, well, everything. Inflation is the direct outcome of monetary expansion in the absence of economic growth. Therefore, gold and silver will be direct beneficiaries of such policy.
At the same time, sovereign and large capital pool (LCP) investors in U.S. debt are seeking to exit their holdings of U.S. dollars, The world’s largest bond fund, PIMCO, and its acerbic chief Bill Gross, are now shorting the U.S. dollar. China has stated repeatedly that it will reduce its holdings of U.S. debt. This is sending a signal to the rest of the sovereign wealth and LCPs that the U.S. dollar should be abandoned. That means, when the convulsions that seize the global financial system, such as that of 2008, manifest themselves, investors will flee less and less to the U.S. dollar, and more and more to other currencies – especially gold and silver. So not only does the price of gold appreciate in strictly nominal terms, but demand for it is growing even as it grows exponentially in price.
That’s why, given this illogical yet nevertheless existing stupidity, the more expensive gold and silver get, the greater will be their demand as a replacement for U.S. dollar denominated safe haven asset classes. The third major factor that is going to drive gold to $5,000 and silver through $300 is related to the first two. Governments, always reactive and never proactive, will eventually start to ratify gold and silver as official currency alternatives as a result of public pressure. The decision by the people of Utah to do just that was big news recently, even though technically and legally, it always was legal tender in that state. It is this final legitimizing step by regional governments that will open the eyes of the otherwise hypnotized American public.
For now, the move is painted as fringe by the idiotic mainstream, who are unwitting pawns for the financial services industry – U.S. Federal Reserve – U.S. Treasury trio of economic under-miners. But contrary to global public perception, this has been a recurring theme in the United States economy, pretty much from day 1. The Daily Astorian, a newspaper of the day in Astoria, Oregon, on May 9th, 1876 published a story the following of which is an excerpt: The people of this country are tolerably familiar with depreciated money.
The great mass of them have had nothing else for the last fourteen years. We are accustomed to depreciated Greenbacks, National Bank Notes, Nickels and Silver, and there are those living who can recall the time when Gold was worth less than Silver. The biggest perpetrators of what we, the people, must soon designate as criminals, else suffer the continuing consequences of no jobs and no future, are the United States Federal Reserve, the United States Treasury, The Commodities and Futures Trading Commission, and the Securities Exchange Commission. “Oh but wait,” say some. “The United States Federal Reserve is not a government body….its private.” And? The Federal Reserve is nothing more and nothing less than the off-balance sheet entity of the U.S. Treasury that permits the illegal fabrication of dollars out of thin air without prosecution.
Of course this off-balance sheet entity is not an official government body. It was designed that way, exactly as Enron set up LJM L.P., to hide losses and perform sundry distasteful and illegal acts in an effort to support its parent entity. When an entity is formed specifically to operate outside of the publicly elected offices of government, but is given dominion over the most important property of the voting public – its money – and when that entity acts in direct opposition to the interests of the public to whom it owes a fiduciary duty, then its status as government or private really becomes irrelevant. All that matters in terms of its identity is its treasonous and fraudulent activity.
The management of Enron went to jail for their larcenous culture of hiding from shareholders the true extent of their losses, and the illegal nature of their everyday operations. With a bit of luck and perseverance, the same fate will yet befall Bernanke, Paulson, Summers, Rubin, Geithner, Gensler, Shapiro and the rest of the Ivy league thieves. In the meantime, the best defense against their intentional destruction of the United States currency is selling dollars to buy gold for capital preservation and silver for low-risk capital appreciation.
The day will come when, instead of teaching that these leaders were nobly trying to ease the pain of financial forces beyond their control, today’s politicians will instead be accurately portrayed as naďve, negligent, and just plain stupid populists whose ignorance of real economic matters was exactly the ingredient necessary to permit the psychopathic and misanthropic banking community to form the financial policies of their governments. Unfortunately, the only ones likely to be alive by the time that happens are now in diapers.
Tuesday, April 19, 2011
S&P threatens to cut U.S. credit rating on deficit
(Reuters) - Standard & Poor's threatened Monday to downgrade the United States' prized AAA credit rating unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years. Kmg Gold Recycling
S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, slapped a negative outlook on the country's top-notch credit rating and said there's at least a one-in-three chance that it could eventually cut it.
A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.
If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. That would threaten to hurt the economy as it recovers from the worst recession since World War II.
"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets and has a short position on U.S. government debt.
Major U.S. stock indexes fell than 1 percent on the day. Longer-dated government bond prices initially fell but recovered to post solid gains as falling stocks took over as the main driver for price action in the Treasury market. Bond prices frequently trade inversely to stocks.
The dollar also rose as more immediate fiscal problems in Greece hurt the euro and supported some U.S. assets.
The cost of insuring Treasury debt against default at one point Monday neared a 2011 high, though it was well below lofty levels hit two years ago when fears of a double-dip U.S. recession raged.
BUDGET BATTLE
The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.4 trillion budget deficit and $14.27 trillion debt burden.
The White House last week announced plans to trim $4 trillion from the deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich. Congressional Republicans want deeper spending cuts and no tax increases.
The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.
A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.
"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.
Even so, Austan Goolsbee, the top economist at the White House, downplayed S&P's move, telling CNBC Monday it was a "political judgment" that "we don't agree with."
DoubleLine Chief Executive Jeffrey Gundlach said Monday that the S&P warning "should serve as an effective cattle prod in pushing the politicians toward a program of spending cuts and tax increases."
"NOT THE END OF THE WORLD"
Some on Wall Street also downplayed the immediate impact.
"If a corporate entity had the same kind of unsustainable leverage problems, it would have been downgraded long ago," said Robert Bishop, chief investment officer of fixed income at SCM Advisors in San Francisco.
"But from the standpoint of the sovereign, being on outlook negative is not the end of world," he added. "Japan, for example, is a double-A credit."
S&P downgraded Japan's rating earlier this year for the first time since 2002, saying Tokyo had no plan to deal with its mounting debt burden.
But unlike the United States, almost all Japanese debt is held by domestic investors. That means the country need not depend on foreigners for financing.
Axel Merk, president of Merk Hard Currency Fund in Palo Alto, California, said Monday's warning was "a wake-up call that we need to do something in the U.S." S&P is "absolutely correct that this is something serious that needs to be addressed."
Moody's, S&P's main rival in the ratings business, also maintains a Aaa credit rating - its highest - on the United States.
For PIMCO, the world's largest bond fund, the picture had become bleak enough to prompt it to announce in February it had sold all U.S. Treasuries in its $236 billion Total Return Fund.
Bill Gross, PIMCO's chief investment officer, said he expected interest rates to climb, the dollar to fall and the United States to eventually lose its AAA credit rating.
The ratings agency said neither the White House nor Republican plan does enough to fix the shortfall, and the tension between the parties has cast doubt on whether they will be able to work together on a long-term solution.
"Looking at the gulf between the parties, it has never been wider than now," David Beers, S&P's global head of sovereign ratings, said Monday. "It takes a lot of political will to bridge this gulf."
A U.S. congressional report last week blamed ratings companies such as S&P and Moody's Corp for triggering the financial crisis when they cut the inflated ratings they had applied to complex mortgage-backed securities.
George Feldenkreis, CEO of Perry Ellis International, said that casts doubt on S&P's outlook.
The ratings agency "does not have the intellect or systems to judge the ability of the U.S. economy or political system to resolve its issues of taxation and needed budget cuts," he said.
Moody's put some issues of U.S. Treasury debt on watch for a downgrade in 1996 when the White House and Congress failed to extend the government's debt ceiling.
The two sides are heading for a similar showdown over the $14.3 trillion legal borrowing limit, which will have to be extended within weeks.
SOURING ON THE DOLLAR
The U.S. debt burden has grown exponentially after a housing bubble burst in 2007 and set off a world financial crisis that toppled several Wall Street banks, drove up the jobless rate and thrust the global economy into recession.
Governments around the world were forced to increase public spending to prevent their economies from lurching into an even worse depression.
The tactics helped spark a recovery but left the United States and other advanced economies, which were hit hardest by the crisis, with staggeringly large debt burdens.
Though it rose Monday, the dollar is down about 5 percent against major currencies in 2011. S&P's move, coupled with record low U.S. interest rates, will do little to make it more attractive, said Kathy Lien, director of research at GFT.
"Even though I don't think an actual downgrade would occur, in this very sensitive or vulnerable time for the U.S. dollar, it's enough to spook investors from holding or buying dollars," she said. Kmg Gold Recycling
S&P, which assigns ratings to guide investors on the risks involved in buying debt instruments, slapped a negative outlook on the country's top-notch credit rating and said there's at least a one-in-three chance that it could eventually cut it.
A downgrade, which would leave Germany and France with a higher rating, would erode the status of the United States as the world's most powerful economy and the dollar's role as the dominant global currency.
If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. That would threaten to hurt the economy as it recovers from the worst recession since World War II.
"This new warning highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," said Mohamed El-Erian, chief executive at PIMCO, which oversees $1.2 trillion in assets and has a short position on U.S. government debt.
Major U.S. stock indexes fell than 1 percent on the day. Longer-dated government bond prices initially fell but recovered to post solid gains as falling stocks took over as the main driver for price action in the Treasury market. Bond prices frequently trade inversely to stocks.
The dollar also rose as more immediate fiscal problems in Greece hurt the euro and supported some U.S. assets.
The cost of insuring Treasury debt against default at one point Monday neared a 2011 high, though it was well below lofty levels hit two years ago when fears of a double-dip U.S. recession raged.
BUDGET BATTLE
The threat of a downgrade raises the stakes in the struggle between President Obama's Democratic administration and his Republican opponents in the House to get control over a nearly $1.4 trillion budget deficit and $14.27 trillion debt burden.
The White House last week announced plans to trim $4 trillion from the deficit over the next 12 years, mostly through spending cuts and tax hikes on the rich. Congressional Republicans want deeper spending cuts and no tax increases.
The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.
A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.
"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," S&P said.
Even so, Austan Goolsbee, the top economist at the White House, downplayed S&P's move, telling CNBC Monday it was a "political judgment" that "we don't agree with."
DoubleLine Chief Executive Jeffrey Gundlach said Monday that the S&P warning "should serve as an effective cattle prod in pushing the politicians toward a program of spending cuts and tax increases."
"NOT THE END OF THE WORLD"
Some on Wall Street also downplayed the immediate impact.
"If a corporate entity had the same kind of unsustainable leverage problems, it would have been downgraded long ago," said Robert Bishop, chief investment officer of fixed income at SCM Advisors in San Francisco.
"But from the standpoint of the sovereign, being on outlook negative is not the end of world," he added. "Japan, for example, is a double-A credit."
S&P downgraded Japan's rating earlier this year for the first time since 2002, saying Tokyo had no plan to deal with its mounting debt burden.
But unlike the United States, almost all Japanese debt is held by domestic investors. That means the country need not depend on foreigners for financing.
Axel Merk, president of Merk Hard Currency Fund in Palo Alto, California, said Monday's warning was "a wake-up call that we need to do something in the U.S." S&P is "absolutely correct that this is something serious that needs to be addressed."
Moody's, S&P's main rival in the ratings business, also maintains a Aaa credit rating - its highest - on the United States.
For PIMCO, the world's largest bond fund, the picture had become bleak enough to prompt it to announce in February it had sold all U.S. Treasuries in its $236 billion Total Return Fund.
Bill Gross, PIMCO's chief investment officer, said he expected interest rates to climb, the dollar to fall and the United States to eventually lose its AAA credit rating.
The ratings agency said neither the White House nor Republican plan does enough to fix the shortfall, and the tension between the parties has cast doubt on whether they will be able to work together on a long-term solution.
"Looking at the gulf between the parties, it has never been wider than now," David Beers, S&P's global head of sovereign ratings, said Monday. "It takes a lot of political will to bridge this gulf."
A U.S. congressional report last week blamed ratings companies such as S&P and Moody's Corp for triggering the financial crisis when they cut the inflated ratings they had applied to complex mortgage-backed securities.
George Feldenkreis, CEO of Perry Ellis International, said that casts doubt on S&P's outlook.
The ratings agency "does not have the intellect or systems to judge the ability of the U.S. economy or political system to resolve its issues of taxation and needed budget cuts," he said.
Moody's put some issues of U.S. Treasury debt on watch for a downgrade in 1996 when the White House and Congress failed to extend the government's debt ceiling.
The two sides are heading for a similar showdown over the $14.3 trillion legal borrowing limit, which will have to be extended within weeks.
SOURING ON THE DOLLAR
The U.S. debt burden has grown exponentially after a housing bubble burst in 2007 and set off a world financial crisis that toppled several Wall Street banks, drove up the jobless rate and thrust the global economy into recession.
Governments around the world were forced to increase public spending to prevent their economies from lurching into an even worse depression.
The tactics helped spark a recovery but left the United States and other advanced economies, which were hit hardest by the crisis, with staggeringly large debt burdens.
Though it rose Monday, the dollar is down about 5 percent against major currencies in 2011. S&P's move, coupled with record low U.S. interest rates, will do little to make it more attractive, said Kathy Lien, director of research at GFT.
"Even though I don't think an actual downgrade would occur, in this very sensitive or vulnerable time for the U.S. dollar, it's enough to spook investors from holding or buying dollars," she said. Kmg Gold Recycling
Friday, April 15, 2011
Precious Metals Update
"Gold pierced the $1440/oz. resistance level, which now becomes support for prices."
The United States Dollar
Since early January 2011 the USD has lost 7.4% of its value and needs to manage any further decline or stabilize at this point in order re-assure holders of this currency, that all is not lost. As we see it there will be short rallies on the way down, but the '74? level will soon be breached and then it's down the '72? level. The technical indicators are firmly in the oversold zone, so a short rally is possible at this juncture; however, as the chart shows, we have had a number of rallies already this year that have amounted to nothing.
If '72? fails, we are in for a very rough time as individual investors, states and countries, implement damage limitation strategies in order to protect what's left of their wealth.
One of the stimulants for the dollar could be the European debt crisis, which is a long way from being out of the woods with Portugal lining up for help and Spain peering through curtains hoping that there will be something left for them. As the euro comes under pressure investors have to go somewhere and the dollar is regarded as the best of a bad bunch. The gold and silver markets are way too small to accommodate their needs; however, if and when they do transfer a small portion of their wealth into the precious metals sector for safekeeping, new price levels will become the stuff of dreams for the metals bulls.
It remains a puzzle to us as to why anyone would want to hold a paper contract that promises to exchange it for you with another paper contract. Maybe it's the fear of the unknown or the fear of change that makes some of us behave like frightened rabbits when confronted by a car's headlights. The inability to assess a situation, recognize that there is a bull market in full flow and then take a position is astonishing to us but as my dad use to say, "You cannot talk sense to a twit"—enough said.
Gold Prices
The $1440/oz. resistance level has been pierced and now becomes support for gold prices. As gold consolidates, the technical indicators become less overbought setting up the next rally. Gold is a class act and has its eye on the next hurdle, which is $1500/oz. and that, in our humble opinion, will fall shortly.
Silver Prices
A 30% increase in silver prices so far this year has rewarded the silver bugs and hammered the shorts. Both the 50dma and the 200dma are moving up in support, however, we would like to see the gap between the 200dma get a little closer to silver prices. A period of consolidation at or around the $40.00/oz. would help, however, the demand for silver as an investment is growing along with the many industrial and medical uses for silver, pushing prices ever higher. As this demand continues to rise, silver prices will be forced to higher levels, in turn the shorts will have to cover sooner or later, so don’t be surprised if we have a record week with a stunning move to the high side in the very near future. Silver has been our favorite investment vehicle for some time now and our intention is to stay with it.
Our strategy remains the same in that physical gold and silver in your very own possession is the first step to take especially if you are new to this market. Secondly, investing in a short list of quality producers has generated handsome rewards, particularly in recent times when their value has been recognized. Finally a few well thought out options trades can add some spice with a boost to your returns on the back of the current volatility in these markets. Do remember to go gently with your investment choices and ensure that you are able to fight another day, no matter how good an 'opportunity’ appeals to you. Otherwise keep building your position as this is the best game in town and today’s metals bugs will be handsomely rewarded in the future.
Thursday, February 24, 2011
The Currency Exchange Rate Background
The exchange rate is the price of one national currency, such as the Canadian dollar, expressed in terms of another currency, for example, the U.S. dollar, or a basket of currencies.
For a very open, trade-dependent economy like Canada's, the external value of the currency is particularly relevant as it affects, among other things, the prices and the volume of goods and services we export and import. Specifically, a rise or fall in the external value of the Canadian dollar will make Canadian goods and services less or more expensive for foreign buyers, and this will tend to boost or hold back their demand for our products. Movements up or down in the Canadian dollar relative to other currencies will also make imported goods more or less affordable, thus increasing or reducing the volume of our imports.
What determines the exchange rate?
Canada has a flexible exchange rate system. Because we have a target for inflation that aims to preserve the domestic value of the Canadian dollar, we cannot also have a target for its external value. So, there is no set (fixed) value for our currency in terms of any other currency. The exchange rate for the Canadian dollar against the U.S. dollar, and indeed against any other currency, floats and is determined by the demand for and supply of Canadian dollars in the foreign exchange market.
Because the bulk of our foreign trade (exports and imports) is still with the United States, the focus of attention is naturally the Canada-U.S. exchange rate. But when it comes to exports, it should be noted that Canada competes with many other countries for a share of the U.S. market. So the exchange rate of those currencies relative to ours also matters a great deal.
Movements in the Canadian dollar reflect the interaction of various domestic and external factors, any one of which may play a dominant role at different points in time. Among these are:
The world prices for commodities and Canada’s status as a net exporter of raw materials compared with other countries, notably the United States which, although a commodity producer, is a net importer of commodities. This being the case, rising commodity prices will cause our dollar to appreciate against the U.S. dollar.
Relative economic performance: stronger demand for Canadian products (from domestic and external sources) will tend to underpin our currency.
Relative inflation rates: if Canada’s inflation rate is persistently higher than that of the United States, the expectation will be that our currency will tend to depreciate, everything else being equal, in order to maintain the competitiveness of our exports in U.S. markets.
Relative interest rates: higher interest rates in Canada would attract investors in Canadian-dollar assets, boosting the value of our currency. But if inflation here is higher than elsewhere, investors might be less keen about such assets, fearing that inflation would erode their value.
Canada’s productivity record relative to other countries, particularly the United States. Rising productivity supports steady, non-inflationary economic growth and higher living standards, while also preserving a country’s competitiveness. Thus, a good relative productivity record would underpin the currency; a poor one would take away from its value.
Trade and current account balances: a surplus in Canada’s balance of international payments means that foreigners are buying more goods and services from us than we are buying from them. To settle their purchases, they will have to buy Canadian dollars, thus boosting the value of our currency.
The size of Canada’s public debt relative to that of the United States, as well as Canadian tax policies and incentives to work, save, and invest compared to those of other countries can work in favour of, or against, our dollar. For example, a smaller public debt (as a share of GDP) in Canada compared with the United States, would work in favour of our currency.
Short-term capital flows: international money flowing into Canada raises the value of the Canadian dollar; domestic money flowing out has the opposite effect. At times of global turbulence, international capital seeks safe haven, usually in the United States, leading to an appreciation of the U.S. dollar against major currencies, including ours.
Domestic political turmoil can have a dampening effect on the external value of our currency.
Interest rates, short-term capital flows, and political developments tend to have more of a short-term effect on the exchange rate.
Longer-term currency movements reflect more fundamental forces at work. Thus, the Bank’s research shows that the evolution of commodity prices is the main driver of the Canadian dollar over time. Commodity prices, however, are essentially shaped by global forces that are beyond Canada’s control. (In this context, a floating Canadian dollar that rises and falls with sharp movements in commodity prices acts as a “shock absorber,” helping our economy adjust with less overall loss in output and employment than if the exchange rate did not move.)
Other factors that influence the exchange rate over the longer term include Canada’s relative performance in terms of economic growth, inflation, productivity, and fiscal position. Unlike commodity prices, these economic fundamentals are very much within our control; and so it is important to ensure that they are as favourable as possible.
The role of the exchange rate in monetary policy
Although there is no target for the Canadian dollar and the Bank no longer intervenes in foreign exchange markets except in very exceptional circumstances, the Bank is not indifferent to persistent currency movements, up or down, and takes into account their effect, together with that of other domestic and external factors, on total demand and inflation in Canada.
In reassessing the outlook for the economy and inflation before each of eight interest rate decisions a year, the Bank carefully examines the economic evidence accumulated since the last decision, including any currency movements. The lens through which this information is scrutinized is always the achievement of the inflation target.
By keeping domestic inflation low, stable, and predictable, the Bank contributes to the long-term soundness of the Canadian dollar. While, by itself, this may not be sufficient to guarantee a strong currency, it does provide an anchor for its external value and is thus the best contribution that monetary policy can make in this regard.
For a very open, trade-dependent economy like Canada's, the external value of the currency is particularly relevant as it affects, among other things, the prices and the volume of goods and services we export and import. Specifically, a rise or fall in the external value of the Canadian dollar will make Canadian goods and services less or more expensive for foreign buyers, and this will tend to boost or hold back their demand for our products. Movements up or down in the Canadian dollar relative to other currencies will also make imported goods more or less affordable, thus increasing or reducing the volume of our imports.
What determines the exchange rate?
Canada has a flexible exchange rate system. Because we have a target for inflation that aims to preserve the domestic value of the Canadian dollar, we cannot also have a target for its external value. So, there is no set (fixed) value for our currency in terms of any other currency. The exchange rate for the Canadian dollar against the U.S. dollar, and indeed against any other currency, floats and is determined by the demand for and supply of Canadian dollars in the foreign exchange market.
Because the bulk of our foreign trade (exports and imports) is still with the United States, the focus of attention is naturally the Canada-U.S. exchange rate. But when it comes to exports, it should be noted that Canada competes with many other countries for a share of the U.S. market. So the exchange rate of those currencies relative to ours also matters a great deal.
Movements in the Canadian dollar reflect the interaction of various domestic and external factors, any one of which may play a dominant role at different points in time. Among these are:
The world prices for commodities and Canada’s status as a net exporter of raw materials compared with other countries, notably the United States which, although a commodity producer, is a net importer of commodities. This being the case, rising commodity prices will cause our dollar to appreciate against the U.S. dollar.
Relative economic performance: stronger demand for Canadian products (from domestic and external sources) will tend to underpin our currency.
Relative inflation rates: if Canada’s inflation rate is persistently higher than that of the United States, the expectation will be that our currency will tend to depreciate, everything else being equal, in order to maintain the competitiveness of our exports in U.S. markets.
Relative interest rates: higher interest rates in Canada would attract investors in Canadian-dollar assets, boosting the value of our currency. But if inflation here is higher than elsewhere, investors might be less keen about such assets, fearing that inflation would erode their value.
Canada’s productivity record relative to other countries, particularly the United States. Rising productivity supports steady, non-inflationary economic growth and higher living standards, while also preserving a country’s competitiveness. Thus, a good relative productivity record would underpin the currency; a poor one would take away from its value.
Trade and current account balances: a surplus in Canada’s balance of international payments means that foreigners are buying more goods and services from us than we are buying from them. To settle their purchases, they will have to buy Canadian dollars, thus boosting the value of our currency.
The size of Canada’s public debt relative to that of the United States, as well as Canadian tax policies and incentives to work, save, and invest compared to those of other countries can work in favour of, or against, our dollar. For example, a smaller public debt (as a share of GDP) in Canada compared with the United States, would work in favour of our currency.
Short-term capital flows: international money flowing into Canada raises the value of the Canadian dollar; domestic money flowing out has the opposite effect. At times of global turbulence, international capital seeks safe haven, usually in the United States, leading to an appreciation of the U.S. dollar against major currencies, including ours.
Domestic political turmoil can have a dampening effect on the external value of our currency.
Interest rates, short-term capital flows, and political developments tend to have more of a short-term effect on the exchange rate.
Longer-term currency movements reflect more fundamental forces at work. Thus, the Bank’s research shows that the evolution of commodity prices is the main driver of the Canadian dollar over time. Commodity prices, however, are essentially shaped by global forces that are beyond Canada’s control. (In this context, a floating Canadian dollar that rises and falls with sharp movements in commodity prices acts as a “shock absorber,” helping our economy adjust with less overall loss in output and employment than if the exchange rate did not move.)
Other factors that influence the exchange rate over the longer term include Canada’s relative performance in terms of economic growth, inflation, productivity, and fiscal position. Unlike commodity prices, these economic fundamentals are very much within our control; and so it is important to ensure that they are as favourable as possible.
The role of the exchange rate in monetary policy
Although there is no target for the Canadian dollar and the Bank no longer intervenes in foreign exchange markets except in very exceptional circumstances, the Bank is not indifferent to persistent currency movements, up or down, and takes into account their effect, together with that of other domestic and external factors, on total demand and inflation in Canada.
In reassessing the outlook for the economy and inflation before each of eight interest rate decisions a year, the Bank carefully examines the economic evidence accumulated since the last decision, including any currency movements. The lens through which this information is scrutinized is always the achievement of the inflation target.
By keeping domestic inflation low, stable, and predictable, the Bank contributes to the long-term soundness of the Canadian dollar. While, by itself, this may not be sufficient to guarantee a strong currency, it does provide an anchor for its external value and is thus the best contribution that monetary policy can make in this regard.
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