Friday, March 30, 2012

Friday Humor

After this week's postings on conspiracy theories of gold's manipulation I thought I'd end the week with this:

Wednesday, March 28, 2012

Chris Martenson Explains Gold Manipulation

In my previous post I mentioned a little about the bias and manipulation of gold prices. If you haven't read it yet please take a moment to read it then come back to this post. 

For people not familiar with central banks and the gold markets I may sound a little like a black helicopter conspiracy theorist. Fair enough. Chris Martenson explains below, far better than I ever could how central banks have "intervened" in many markets in the past and how this ties in with loose money and the massive printing we now see.

Gold Is Manipulated (But That's Okay)

The price of gold is being actively managed by central planners and their proxies. The main culprit here appears to be the US authorities, as the manipulation is most apparent in the US open gold market. For the most part, this 'management' has resulted in letting the price of gold rise, but not too much, or too quickly.

The price of gold has always been an object of interest for governments and central bankers. The reason is simple enough to understand: Gold is an objective measure of the degree to which fiat money is being managed well or managed poorly.

As such, whenever paper money is being governed poorly, the price of gold becomes an important barometer. And this is why the actual price of gold is a strong candidate to be 'managed.' Or 'influenced'. Or 'manipulated'. Whichever word you prefer, they all convey the same intent.

Some who are reading this are likely having an eye-rolling moment because they hold a belief that there is no conspiracy to manage the price of gold.

This is an interesting belief to hold because it runs heavily against the odds. It's similar to holding the belief that the house in Vegas does not have a statistical advantage.

We could spend a lot of time discussing how a belief such as 'gold is not being manipulated' gets promoted and inserted into the popular consciousness, but we won't. Instead, we'll simply note that the people who hold this belief -- and you may be among them -- react to the concept at a visceral level, often with strong emotions such as anger or contempt, and even anxiety.

When a strong emotional response surfaces during a conversation of ideas, it usually means that beliefs are in play -- neither facts nor logic. Experience has taught me that when someone becomes dismissive or angry or hostile when the idea of price manipulation is discussed, it's best to simply drop the conversation and move on. No combination of logic or facts is effective against a deeply-held belief. It's better to wait until some new evidence calls that belief into question, opening the door for revisiting the topic.

But for those with an open mind, there is a very interesting trail of dots to connect.
The Logic of Gold Price Management
Unlike beliefs, opinions can be discussed and even modified without first running through an emotional thicket. They rest on data and ideas that can be consciously accessed and are therefore easier to change.

It is my opinion that the price of gold is being actively managed and/or overseen by official parties. On a strictly qualitative level, I hold this opinion because if I ever found myself in charge of a system of money rooted in confidences, as is our current fiat regime, I would consider the active management of the price of gold one of my fiduciary responsibilities.

Gold is an important signaling mechanism, and our entire money system is faith-based. Of course anything and everything that could cast doubt on that system would be controlled if it could be controlled.

To emphasize the point: If gold were suddenly to spike up to $5,000 an ounce, all sorts of troubling questions would emerge for people. Such as, is there something wrong with the dollar? Is the world falling apart? A rapid spike in the price of gold would certainly cause people to question the current state of the world of fiat money, and that is an unpardonable sin when your money is, at root, faith-based.

Instead of asking why do you think the price of gold is controlled? I ask, why do you think the price of gold is NOT controlled?
Managed Prices and Signals
Aside from my opinion that our faith-based fiat money system mandates the management of the price of gold as a matter of fiduciary responsibility for those in power, here are some other facts that we have in our possession:
  • The quantity of money is managed
  • The price of money is managed (via interest rates)
  • Because interest rates are being managed (mangled?) to near zero, it means risk tolerances and preferences are being managed towards taking on higher risk
  • The price of oil is openly managed, with strategic releases from time to time
  • The price of food and energy are managed via subsidies, both direct and hidden
  • Official statistics (e.g., GDP. inflation, employment) are heavily biased, massaged, and managed to tell a rosy story vs. a more realistic version, which means that perceptions are managed
Out of all these efforts, certainly the one with the most dramatic impact is the management of the price of money. That sets the stage for nearly every ill that follows, especially including the encouragement of taking on additional risk and the inevitable malinvestments that result.
Bernanke on the Fed’s Interest in Stocks
In a Wall Street Journal op-ed, Bernanke openly revealed something that was already obvious to many: The Fed has been very carefully following the equity markets because of the importance of rising stock prices in fostering consumer spending. That is, the stock market is a signaling device, and the Fed is, naturally, quite interested that it signal the correct things.

More bluntly, the Fed is interested in seeing the stock market go up instead of down.

Here’s Bernanke in an op-ed placed in the Washington Post back in 2010 discussing the effects of QE2:#f6f6f6;">

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.

For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
Yes, Virginia, the Fed does watch stock prices closely. And it targets their efforts to assure that the ‘virtuous circle’ is in play. No real surprise there.

Given that big list of managed prices and signals, with literally nothing left untouched because of the price-of-money effect, we are again left to wonder how likely it is that anything has escaped the attention and efforts of our well-meaning (but certainly misguided) central planners.

To my view, gold is simply far too important to be left to its own devices. The evidence strongly suggests that it indeed has not been.
Evidence for Price Manipulation
Critics of the idea of price manipulation might scoff and ask, if gold is manipulated, as you say, then how do you account for the 590% price increase over the past 11 years?

The idea here is that if gold were manipulated or controlled, there's no way it would have 'been allowed" to increase by that much.
In the above chart, we can see that gold has been in a remarkably steady run for the past three years. It is almost as if a ruler has been drawn under the price of gold, which has rarely deviated by much from that trajectory.

Certainly some might argue that this is an extremely poor piece of data in support of the idea that the price of gold has been manipulated, unless we want to argue that it has been manipulated upwards to rise nice and steadily (like air being slowly pumped into a balloon).

A fair point, perhaps, yet it is one that not only completely falls apart, but bolsters the case for price suppression when we examine the price action of gold in the daily vs. the overnight markets.
Note in this next chart that if one simply bought gold and held it only during the open and close of the US daily fix, one would have lost 70% of one’s money during the same period of time that gold rose in price by more than 500%.

As the chart above shows, the performance is dismal. For example, take a hypothetical gold investment fund starting with $100m in 2001, use it to buy gold only at the US AM fix and sell at the US PM fix until the present, and it would now be left with just $31 million, almost a 70% loss in just under ten years. Over the same time period, gold prices have risen over 590%.

Here we might ask a simple question: How is it possible that an asset that rose across all world markets by more than 500% fell during active trading in the most important market of them all (by volume) by 70%?

Trading is a zero-sum game, and for every winner there is a loser. Who was it that lost so much money in the daily markets fighting a tide that lifted the golden boat by more than 500%? How can there be such an uninterrupted series of losses for gold during this period?

There's a trading maxim that goes like this: Once a trend is established, other traders will identify that trend and either ride it or step out of the way. That is, sooner or later the trend stops, because too many people have caught onto it and its profitability gets traded down to zero. Yet selling gold into the daily market has been a sure-fire winner for over an entire decade.

For gold to have fallen so much during the daily market, yet be up overall, simply means that gold must be up strongly in the overnight markets. Indeed, this is the case.

We can easily see the startling difference in the chart below. It compares the results of a simple 'buy and hold' investment in gold over the past ten years vs. a more active (and clever) strategy that both shorts gold during the daily hours and then buys gold long for the overnight session:


This strategy captures both the daily losses and nightly gains into a single, combined monster gain that has returned over 5,000% over the past decade with very few drawdowns, handily beating the price of gold itself by a factor of ten.

Again, how is it possible for a single strategy to be such a reliable winner without being competed away to zero? A very simple explanation is that an entity that does not care about potential losses simply and reliably sells gold into the daily markets.

After a while, the self-reinforcing aspect of this behavior might entice other market participants to join along and sell into the daily markets. However, even if that were the case, in order to be neutral (as all trading eventually has to be) these positions would eventually have to be bought back. And given the fact that gold has risen by more than 500% over this time frame, there would be no safe time to do this outside of the daily session.

So the question persists: Who has been selling into this market, and how large are their positions? Put more bluntly, how much gold is actually left in Fort Knox? Alternatively, just what exactly is contained within the $180 billion “other assets” line on the Fed balance sheet? Deeply underwater gold futures positions, perhaps?
Prior Known Efforts at Manipulation
One other daunting challenge to the idea that gold is not being manipulated is that such a thought requires us to presume that all the past known and proven efforts at gold manipulation are just that: in the past.

One thing I know is that when a tool has proven to be effective -- whether it is secretive liquidity injections by the Fed, or MBS purchases -- that tool tends to get used again and again, and in increasing amounts if called for. That is, what works is never dropped; it is merely set aside when not needed.

The best we could argue here is that gold truly has no legitimate signaling mechanism at present, and therefore controlling its price has been set aside. For now…

Or, if we believe that gold indeed has an important signaling function, it becomes all the more difficult to argue that its price is simply left to ‘the market’ to set.

One example:
#ffffff;">On June 3, 1975, Fed Chairman Arthur Burns, sent a "Memorandum For The President" to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon's actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971.
In a nutshell Burns' entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would "easily frustrate our efforts to control world liquidity" but also "dangerously prejudge the shape of the future monetary system."

Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 "could result in the addition of up to $150 billion to the nominal value of countries' reserves."

One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: "liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control."

Aside from the gratuitous observation that even 34 years ago it was painfully obvious how "massive" liquidity could and would result in runaway inflation and the Fed actually cared about this potential danger, what highlights the hypocrisy of the Fed is that when it comes to drowning the world in excess pieces of paper, only the United States should have the right to do so.
If the price of gold was not ‘controlled,’ monetary policy outcomes would have been somewhat removed from the direct control of monetary bureaucrats. Gold was a threat to an institution dedicated to increasing its effectiveness and power. To give up the battle to control the price of gold, we have to presume something that has never happened in history: the willing abandonment of bureaucratic power to an outside force.

There is also the London Gold Pool of 1969 and the strong dollar policy of the 1980s, which reveal that in the past, the price of gold has been officially monitored and controlled in order to help direct either a desired interest rate or dollar strength outcome.
From Wikipedia:
#ffffff;">The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.

The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses. The United States provided 50% of the required gold supply for sale. The price controls were successful for six years when the system became no longer workable because the pegged price of gold was too low, runs on gold, the British pound, and the US dollar occurred, and France decided to withdraw from the pool. The pool collapsed in March 1968.

The London Gold Pool controls were followed with an effort to suppress the gold price with a two-tier system of official exchange and open market transactions, but this gold window collapsed in 1971 with the Nixon Shock, and resulted in the onset of the gold bull market which saw the price of gold appreciate rapidly to US$850 in 1980.
The point here is that gold price suppression is a clear matter of history at this point and has been well studied. Somehow I think some people have forgotten that history and, quite oddly, consider it less likely that gold suppression is happening today than in the past. I say oddly because the number of overt market interventions has been increasingly enormously over the past few years, and one might think this would soften opposition to the idea that gold, too, is being actively targeted.
Supply and Demand
So, if the price of gold is subject to manipulation -- or influence or control, if you prefer those terms instead -- in a way that reliably holds the price in check, then why should we buy it? In a few important ways, it's because of the very fact that gold remains the subject of so much official concern and secrecy.

The laws of supply and demand tell us that anything with a cheaper-than-market price will experience stronger-than-usual demand. In the case of gold, we might suspect that purchases of gold have been bolstered by a weaker-than-otherwise price.

Among those benefiting from buying cheaper-than-otherwise gold would be anyone and everyone who has bought gold lately. Private and official purchasers alike have been getting a very good price, indeed. Where you and I can be thankful for less expensive gold as we add to our holdings, so, too, can India and China be pleased at the national level.

If a future gold standard is in the works, then whoever has the gold at that point in time wins. To any given nation, official gold stocks held by the central banks represent just one stock of gold, with that held by private parties representing another. India has always had a robust domestic gold market and is among the strongest of the strong hands. Gold goes into India and just never seems to come back out.

China legalized and then modernized the gold market for its citizens, and gold sales there have been increasingly robust over time. Germany recently faced a 'call from within' to repatriate the gold that is currently held in its name in reserve by the New York Fed, perhaps channeling the concern that said gold would be safer within its own borders than in the US.

Given the confidence-shaking rehypothecation fraud perpetrated by MF Global, a bit of caution on the part of foreign concerns regarding the US's trustworthiness is warranted.
All told, we are seeing a very interesting game play out around gold, and my suspicion is that it is the possibility of eventual re-monetization that motivates some of the moves. If this comes to pass, the gold price suppression will prove to be a most unfortunate mistake, providing short-term political and market cover for excessive money printing while sacrificing long-term advantage to those taking the other side of the suppression trade.

Yup, as I said, he explains it better than I ever could. After reading this post in addition to the previous CNBC/gold post, you should be connecting some dots. The Fed needs to get growth going. Rising stock prices creates a wealth effect that gets consumers spending. Combine this with historically low interest rates and lots of printing and you have the greatest monetary stimulus that's ever been enacted. The problem that comes with all that stimulus, however, is a devalued dollar and inflation. That makes stock prices higher, but it also makes oil and gold prices higher. If people buy gold rather than stocks then Bernanke has a problem. He doesn't want a competing currency. He needs you to be a good sheep and buy stocks and spend your cash. Competing returns from gold cannot be allowed

So is it working? Recall my recent post of Biderman from TrimTabs. Retail investors have been pulling their money out of stocks in droves for the last four years. The Institutional investors are driving up the market all on their own on low volume trading. Oil is driving up gas prices and slowing the recovery. Shadow Stats reports the real inflation rate is 11% (General Mills also reports 11% increase in costs)and yet we have seen no meaningful recovery.

One thing is certain: somebody is expending huge resources in order to keep the price of gold low in order to allow China to buy it on the cheap. It was true then and its true now.

CNBC Doesn't Want You To Own Gold

Most people who work in the investment industry are well aware that CNBC is a big promoter of stocks earning them the name "Bubblevision". That should be no surprise at all given that CNBC's ratings exploded through the stock bubble of the 1990's. Its understandable that they would love to see viewership come back along with the stock market. I bring this up because its important to understand what biases exist from the places where you may be counting on for accurate market information.

But its not enough for CNBC to promote stocks. They have regularly downplayed or even belittled gold ownership as an investment over the past several years, even as gold reached new highs for over ten years as the stock market had some of its poorest 3, 5 & 10 year returns since the great depression of the 1930's (As of this date the S&P 500 returned 2% over the past 5 years and 4.38% over the past 10 years. See link.)

Peter Schiff has been a regular on CNBC and is a straight shooter that in the past has been laughed off the set for saying gold would go higher and the real estate market was in big trouble. In recent years though he's often met with nervous laughter from the so called "experts" on the TV show "Fast Money" who are aware that he has been eerily correct. Knowing that, watch this video from yesterday where Schiff gives his update on both stocks, treasuries and inflation. Pay particular attention to Guy Adami breaking with the pro stock bias (at around 3:30) and Melissa Lee's attempt to reassert the CNBC bias (at 5:15). Notice she calls him "extreme". Guy Adami is no longer buying the CNBC line.

Interesting no?

Now to get a better feeling of CNBC's bias against gold take a look at this gold story posted March 27th. Notice the title:"Gold Prices Already Peaked in 2011: Report".

The story is about CPM Group's report that is generally positive on gold but points out new highs may not be seen in 2012. CNBC spun te report to sound highly negative and yesterday implied the price target was $1,400. Today the story has been changed to read as follows:

“We are looking for the price to stay above $1,500 [an ounce] this year and above $1,400 over the next few years,” says Jeff Christian, Founder and Managing Director of the CPM Group.
 The first version which was highly negative was at the top of CNBC's webpage on the evening of March 27th. The updated, more balanced, article is buried on the bottom of the page on March 28th. I seems as if there is one story for the retail investor who may be viewing the web page in the evening and a different version for professionals who may be viewing it during the day. Sound paranoid? Well how about this...

The original article showed a graph of gold with a not so subliminal message. Take a look at the graph posted in the original story that evening:

Now compare it to today (March 28th):

How the original graph could be a mistake is hard to imagine. Notice in the bottom left it says "Source: CPM Group". So is this reputable commodities research group so incompetent that their graph showed gold at zero??

So what am I getting at with my little conspiracy theory? Its generally commonly accepted that the Federal Reserve is using its primary dealers like JP Morgan to keep the price of gold and silver down by taking short positions (a bearish trade) and occasionally selling massive amounts of contracts all at once to trigger algos that will further the selling (As happened on Feb 28th Leap Year Massacre). The reason is simple: the Fed is printing like crazy and is afraid people will lose confidence in the dollar and pile into gold and silver. Because despite what Ben Bernanke says, gold IS money. For QE to work, it needs people to keep holding dollars and buy stocks even as it devalues dollars and artificially inflates the price of stocks. This is what Schiff was referring to in the video.

So is CNBC acting on behalf of the Fed? Who knows, but if they were just interested in reporting on the market why so negative on precious metals?

Friday, March 23, 2012

Wednesday, March 14, 2012

The Dow Gold Ratio (Updated)

Reading some gold blogs today many seemed very frustrated that gold got hit again. On this site, I believe gold is an investment for long term wealth preservation while central banks keep printing. That's why the blog is called Macro Wealth Preservation and not "hot stock tips". I can't pick stocks. I can however usually spot macro economic trends and usually can profit from it.

With today's sharp move down in gold I thought I'd review some of the historic reasons I have been a gold bull for the past several years.Some people think two quarters from now is the "long term". I like to go a bit further to put things in perspective by looking at historical information. History often repeats itself, especially economic history. The Dow to Gold ratio can give us a long historic perspective. The ratio is simply the price of the Dow compared to the price of gold. Today the Dow finished at 13,194 while gold is about $1,642 or a ratio of about 8. There have been times though that the Dow ratio has approached or hit 1:1. Below I present the historic graph of this ratio:

Notice that the ratio approaches close to 1:1 after the 1929 crash. At this time we had a gold standard, the price was fixed. The entire ratio movement came from the decline of the Dow. In the 1970's, you may recall from previous posts that the US ended the gold standard on August 15th, 1971. The price of gold was allowed to float while inflation and oil shocks pushed the Dow down. Finally, notice the ratio has been in decline since 2000 when the dot com bubble burst. The graph ends at 2009, but as I showed above, the ration is about 8 today, continuing its decline.

Will it make it back to 1 again? Every fundamental analysis shows it should continue moving in this direction. The western world and Japan are still printing like crazy. QE never ended, it just continued under new names like "operation twist" and LTRO in Europe. The world has too much debt, more than can be repaid given reasonable GDP growth rates, The only other option is to print and thereby inflating the debt away.

What reminded me of the Dow/Gold ratio were two clips I recently saw: the one I posted Monday where Jim Rickards noted that gold should be around $7,000 given the money supply and a post from Charles Biderman of TrimTabs up in Marin who believes the Dow would go to 6,000.

So one expert thinks the Dow should be around 6,000 while another believes gold should be about 7,000. Assuming these are rough numbers, wouldn't that bring us to about a 1:1 ratio?

While reading comments at I found this link to an article on this subject that has more up to date graphs and information. Its a must read and you can find it here.

Monday, March 12, 2012

Jim Rickards: Gold Should Be at $7,000 an Ounce

Jim is back and explains how Gold should be around $7,000 without gold market manipulation. What's interesting is his explanation of how this is nothing new and goes back to the 1960's when the US government decided it could spend as much as it wanted.

What A Real Job Recovery Looks Like

Much has been made recently of the jobs gains that are "proof" of a jobs recovery. As I've mentioned before, the current unemployment rate does not necessarily reflect reality given that many people have been unemployed so long that they are no longer counted in government figures. This skews the unemployment rate downwards as the number of people "seeking employment" are less than the number who desperately would like to work but are no longer looking or have dropped off unemployment due to exhaustion of benefits. The media refers to them as the 99ers, those who have used up the extended 99 weeks of benefits but have not found employment.

One measure that adds context to the current unemployment rate is the labor participation rate. This number shows how many people are counted in the current labor force. When times are good, people will see that jobs are available and people will seek work. Those that deferred entering the labor force or had given up finding a job will then come back into the labor force.

Below I present two graphs. One is from the 1980's when we clearly had strong GDP and job growth. The other is our current environment. Keep in mind that we currently have a declining unemployment rate. The question is what does it mean in light of the labor participation rate.

As you can see, during the 1980's people entered the labor force as jobs became widely available.

In this recent graph we can see that even as unemployment has declined, so too has the labor participation rate.

So what does it mean? If the economy is truly getting better we should surprisingly expect the unemployment rate to increase. Why? Because it will mean that many who have given up looking for work will re-enter the work force with the hope that they may successfully resume their job search. If, however, the labor participation rate continues to decline it will merely mean that more Americans have given up and are dropping out.

Graham Summers is not optimistic. In Five Charts That Prove We’re in a Depression he uses data from the St Louis Federal Reserve that paint a stark contrast to the "good news" you may be hearing on the nightly news. Keep in mind this data comes from the same government that report the unemployment data. The Fed is, of course, aware of all the data and make policy based on reality even if they are selective in what they promote. Why? Because in our modern consumer economy confidence is the single most important factor in influencing the economy. A rising stock market (even if the gains are nominal and not real given the inflation rate) is the single most important factor consumers use to gauge their personal situation. What's the next? The price of gas. For this reason, I'm not particularly positive on the economy at the moment.

Let's hope I, and Graham Summers are wrong.

Friday, March 9, 2012

What Does A Real Precious Metals Bubble Look Like?

ISDA: Greece Defaults

Well, now we get to see which banks are solvent who issued CDS on Greece. Keep in mind, when Lehman went under in 2008 the markets were OK for a while until traders began to understand the ramifications. Because of that I do not expect Monday to necessarily be big day in the markets. I'm sure this will be the subject of several posts in the weeks to come, but today I can only offer this from ZeroHedge:

In a nutshell---okay, a coconut shell---this seems to be where we are:
1)  Greece was able to write off 100 billion euros worth of debt in exchange for a 130 billion rescue package of new debt, of which Greece itself will receive 19%, or about 25 billion, so that it can continue to operate as an ongoing concern.  Somehow Greece is in a better position than before, with more debt and less sovereignty and still---by virtue of sharing a common currency---trying to compete toe-to-toe with the likes of Germany and the Netherlands, kind of like being the Yemeni National Basketball team in an Olympic bracket that includes the US, Spain and Germany.  At least a "within the euro" default prevented bank runs in Portugal, Spain, Italy et al.

2)  As a result of the bond haircuts, Greece has many pension plans that can no longer even pretend to be viable, at least according to the original contracted scheme, but pensionholders still working can take heart in the fact that their current wages will be cut, too.

3)  CDS buyers will have to sweat bullets, jump through hoops, and be forced to endure every cliche known to man, but they might end up getting something for all their trouble, provided their counterparty is solvent and that counterparty itself is not heavily exposed to an insolvent party or a NTBTF institution, otherwise known as a Lehman Brothers.  Expect the legal profession to be the prime beneficiary of this "event", as any new CDS contract will be at least a hundred pages of boilerplate longer in the future.

4)  Good luck to any less than AAA rated sovereign who wants to issue debt from now on out.  That contracts can now be unilaterally abrogated, as Greece' bonds were with the retro-CACs, bodes ill for attractive pricing from here on out.  Peripherals in the EU will suffer most, as they face the added indignity of being subordinated to the ECB at any point the ECB chooses to exercise its divine right of seniority.  The thing that used to be called the risk free rate no longer exists.  Bill Sharpe take note.

5)  One hundred billion euros worth of perceived wealth evaporated.  That can not be a good thing for a Eurobanking system already capital short, as it raises leverage (quick back of the envelop calculation) by about 6% across the board.  It also will not make the interbank market any more trusting, thus increasing the likelihood of perpetual LTRO.  LTRO lll looks to arrive sooner than QE lll.

6)  With the drawn-out Greek event and the LTRO, Europe might believe it has firewalled the system for at least three years and limited damage to Greece and Portugal (who will likely undergo a similar default by the 3rd quarter).  LTRO-provided liquidity, it is hoped, will lower market rates enough in Spain and Italy so that those countries can meet sovereign bond obligations and both service existing debt and issue new debt.  When the LTRO expires in 2015, "hopefully" something called organic growth will have taken over in countries imposing severe austerity measures on their public sectors, so that debt servicing becomes easier.  Organic growth obviously is something that comes in a can, a can which has been kicked out to 2015.

7)  As Europe now speaks increasingly of greater EU financial integration, Sarkozy's poll numbers will be the victim and a less EU friendly individual will likely win the upcoming election.  Since France and Germany fortunately have a long and storied history of being the best of friends, and no one in either country would ever pander to nationalist sentiments, this shouldn't present a problem.

8)  Given how much angst was caused by the drawn out Greek affair, the Spanish leader knows he has enormous leverage with EU leadership and he can continue to do what he has been doing with regard to ignoring the deficit targets demanded/suggested by the EU.  The EU might well bark at him, but they cannot afford to bite at this time.  Muchos gracias, Greece.

Wednesday, March 7, 2012

Jim Grant Explains Why Fed Policy is Failing

Here's the link

Jim also reminds us that in the depression of 1920, the Fed and Treasury behaved much differently and got very different results than today or in the 1930's. Remarkably, economists seem to have forgotten this valuable lesson.

When Jim refers to returning to capitalism he is referring to the hyper intervention in markets that we've seen since 2008 (And arguably for the past 30 years). The financial crisis of 2008 has been the both the catalyst and excuse for constant intervention whether it be in housing prices, energy prices, interest rates, currency, and as we saw during the Leap Year Massacre, that alternative currency: Gold. Make no mistake, just as central banks periodically "intervene" in currency markets, the Fed was almost certainly behind the gold/silver intervention. 

How else do you explain the sudden sell off of gold on absolutely no news? 10,000 contracts were sold within a few minutes without any regard for "best execution" of the trade. Any rational seller of that many contracts would normally seek the best price and sell gradually so as not to move the market and end up with lower and lower prices. This seller dumped them all at once, knowing that it would drop the market immediately and trigger the computer algos of HFT's setting off further cascades of selling. It was no accident. It was premeditated. And I suspect Ron Paul knew it was coming when he was talking to Ben Bernanke on TV and brandishing a Silver Eagle. The two coincided with each other.

Why do they feel a need to do this? Because gold and silver are currencies that they can not control. Every rise in the price of gold exposes the money printing of the Fed and central banks of western economies. Gold had been approaching an important technical level that if breached, would have led to a much higher price. If gold rises too far too fast then even the sheeple will take notice and start buying. When that happens you then have a self-reinforcing cycle of higher prices and greater interest in buying, just as you did with tech stocks in the 90's. The central banks know they cannot stop the prices of gold and silver from rising, but they can manage their ascent to a more reasonable rate that will not panic the sheeple and wake them to the massive devaluation of the currency they get their paychecks or government benefits in.

As Jim points out, the recognition of the crisis in 1920’s prompted the Federal government to reduce spending to match the lower revenues (Just as any business does today). It did not interfere with the market. The result was a violent downturn followed by a relatively quick recovery. In 2008 we chose instead to “extend and pretend”. We saved the banks, allowed them to ignore loan losses by changing accounting rules and flooded the economy with cash. By saving the banks instead of allowing them to fail, we have delayed that point in time where poor investments, like sub-prime loans, are wiped off the books and new lending can begin anew. 

Until we let the market function, we are merely extending the pain and malaise.

Why Is The Price Of Gas Going Up?

Thursday, March 1, 2012

How do you hedge the cost of rising oil?

We know the price of oil has gone up in dollar terms and we know gold has gone up in dollar terms. So, if we price oil in an alternative currency, say gold, how has the price of oil changed?

Sovereign Man provides the answer, courtesy of

 Click to enlarge

Oil has been in a deflationary down trend since 2008, which makes sense given a global slowdown that has not found a strong recovery. That leaves the value of the dollar (oil is globally priced in USD) as the primary factor in the nominal increase in the price of oil.

Surprise! ISDA Finds No Greece Default Plus Gold Massacre Update

I discussed the role of Credit Default Swaps, the big banks and Greece here. Today we learn that ISDA has, in fact, declared Greece not to be in default though they will revisit the issue later.

Zerohedge has their own comments on this surprising (not really) event here.

In a somewhat related matter, Jim Sinclair discusses how yesterday's gold/silver massacre occurred simultaneously with about $700 Billion in new stimulus through US Dollar swap lines courtesy of the US Federal Reserve. Its a great interview and puts a better perspective on the gold market. Click here for the MP3. Sinclair views yesterday's event as a central bank intervention much like the currency interventions often seen in the FX markets by countries defending their currency (often devaluing it against other currencies to stay competitive). Given the close relationship between currency prices, quantitative easing and gold prices, this seems entirely possible.

Yesterday, when I watched the video I posted of Ron Paul squaring off with Ben Bernanke, I had a sense that we were seeing a public display in a much larger game being played behind the scenes. Many people seem to think the gold market was attacked somehow as a result of Ron Paul's "performance" with the silver Eagle coin. I disagree. I'm only speculating, but my sense is that Paul knew there was an intervention about to happen and made the choice to use his time to publicly make the point that gold & silver are the only true money despite was about to transpire in the markets.