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Saturday, June 30, 2012

News From the "London Trader"


Things are picking up in the markets and you will be seeing more frequent posts here over the next week. I only try to post when I either have something to say or want to point out something important that I have read. Recently there have been a number of things I think are important both to gold and the overall macro economic environment. More physical gold is being bought and delivered to the East, almost certainly including China. Though gold may not be available on the London exchange for delivery, Central banks can use the reduced "paper price" on sell offs to lock in orders from refiners who are backlogged on orders for physical delivery. The following is a description of what's been going on behind the scenes in the last two wild weeks of trading in gold.

Now to the "London Trader".

From King World News:


With many global investors still rattled by the recent price action in gold and silver, today King World News interviewed the “London Trader” to get his take on these markets.  The source told KWN that not only was a shocking amount of paper gold sold in just 4 hours yesterday, but it was also confirmed that the mainstream media is not reporting the staggering amount of physical gold that has actually been purchased by China recently.  Here is what the source had to say:  China has purchased hundreds of tons of gold in the last couple of months.  China is not disclosing what their true reserves are.  Russia is delaying disclosure and so is Iran.  We saw record gold imports of over 100 tons through Hong Kong to China in April, as reported by the mainstream media, but what has been reported is just the tip of the iceberg.


The London Trader continues:

“What we've seen is a dramatic acceleration of physical gold purchases as the price has been drawn down. Staggering amounts of physical gold are being purchased.  The acceleration of physical purchases, at these lower levels, is the reason why gold has been holding firm and building such a nice base.  

I want to be very clear about this, in addition to what is being reported by the mainstream media, we have seen hundreds of tons of additional physical gold being purchased by China over the last three months....
 
 

“What happened yesterday in the gold market was very interesting.  One full hour before Bernanke's testimony, the bullion banks started selling.  Over the next 4 hours, the bullion banks sold the equivalent of 515 metric tons of paper gold.  This was in just 4 hours, and again, the selling started one hour before Bernanke’s testimony.  

The selling went on for another 3 hours after the Fed Chairman began to speak, and as I said, over 515 metric tons of paper gold was sold.  During this entire takedown, there was zero physical gold available for sale in the market.  However, this action did create tremendous supply for the Eastern buyers to lock in the spot price of gold.  This will patiently be converted to physical in the coming weeks. 

The real question here is, how could an entity begin selling such a massive amount of paper gold when there hadn’t been any news (starting to sell before Bernanke's testimony)?  

During this coordinated attack on gold, hedge funds and managed money were being forced out of their paper positions.  A large wave of selling entered the paper gold market and traders saw the price of gold drop $40 in a matter of minutes.  So the action was orchestrated by the Fed, and Fed-speak was used to assist in the takedown.  

On the opposite side, the rise we saw last Friday was not a natural rise, it was a squeeze of the hedge fund shorts. After squeezing the hedge fund shorts on Friday and actually getting them to take on some long side exposure because gold took out key resistance levels, they then dropped the gold market like a stone yesterday.  So the commercials are ringing the register at both ends of the tape.  But in reality, what the bullion banks are trying to do is to get out of some of the massive naked short positions that are on the books.

During all of the chaos of the last couple of months, the Eastern hemisphere has been vacuuming physical metal out of the market.  However, supply is very tight out there.  As I mentioned earlier, no physical gold was for sale yesterday during the takedown, just paper gold.  Gold actually went into backwardation, and silver has actually been in backwardation for weeks.  For immediate delivery of gold, in size, we are seeing delays, but silver is extraordinarily backlogged.  

Also, there was an absolutely staggering amount of silver that was purchased by an Eastern buyer three weeks ago near the $27 level.  This order was breathtaking in terms of the size.  It is currently queued up at two refiners, but has been backlogged for the last three weeks and running.  In other words, we are looking at serious backlogs for physical silver.

So as I said earlier, the bullion banks are ringing the register at both ends, while trying to extricate themselves from their short positions in the paper market.  They are attempting to do this before transparency comes in to the market.  They do not want a situation where the aggressive hedge funds actually get evidence that these bullion banks are naked short.  

They are concerned that if it is discovered they are naked short gold and silver, those hedge funds will aggressively target those banks.  This is what happened to JP Morgan, recently, when the London Whale got caught.  As soon as Jamie Dimon was forced to admit a $2 billion loss, the sharks realized they were vulnerable and came in to attack.  That has greatly magnified the size JP Morgan’s loss.  The last thing powerful entities want to see is for this to occur in the gold and silver markets.”










Will Gold Finally Become Tier 1 Capital?


In a previous post I discussed what the Bank of International Settlements is, what Tier 1 capital is and how it relates to gold.

Today we examine the BIS' review of Basel III and how it may effect gold if it becomes Tier I capital.

From Stratrisk:


The Basel Committee for Bank Supervision (BCBS) is about to decide something crucial to bankers, sovereign nations, and gold investors alike.
As part of the Bank of International Settlements (BIS), the BCBS is reviewing the upcoming new Basel III rules. That may sound arcane to you but I promise it is not. Though rarely discussed in the mainstream press, the all-important Bank of International Settlements is essentially a global central bank to the world’s central banks. Its goal is ostensibly to provide global stability to the monetary and financial systems.
In a surprise twist that only a few years ago would have been considered preposterous, the BCBS is entertaining whether gold should qualify as a full-fledged Tier 1 capital asset. Currently, the precious metal is relinquished to a Tier 3 status, deserving no more than a 50% weighting at that.
Here’s why that distinction is important and potentially astonishing.
Achieving Tier 1 status would credit gold with the recognition it’s been denied ever since Nixon closed the gold window on August 15, 1971.
In essence, it would mark the official recognition that gold is real money. But that’s not the only reason gold is gaining respect. Other factors are brewing that will set the stage for the next leg up in gold prices.


 
I don’t think we should assume that gold would automatically increase in value if it were to become Tier 1 capital but, It would likely result in not being as quickly sold in market declines as we saw in 2008. During that period, stocks were dropping sharply and banks and institutions were getting margin calls and were forced to liquidate gold to raise capital. The result of this was gold getting beat down along with stock in 2008, at least briefly, before rising again to new highs.

If gold becomes Tier 1 capital, it is central banks finally admitting that gold, is in fact, money. This would make gold a recognized currency and store of value both outside and inside the banking system.

Friday, June 29, 2012

Connect the Dots


The following is a re-post from zerohedge.com and is a great summation of where we are today. The last line sums up what I am trying to do here at this blog: turning victims into bystanders.

Submitted by Simon Black of Sovereign Man Blog,
This week may very well go down as ‘connect the dots’ week. Things have been moving so quickly, so let’s step back briefly and review the big picture from the week’s events:
1) After weeks… months… even years of posturing and denial, Spain and Cyprus became the fourth and fifth countries to formally request aid from Europe’s bailout funds on Monday.

In doing so, these governments have officially confessed to their own insolvency and the insolvency of their respective banking systems.

Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. (Humorously, Slovenia’s Finance Minister denied any such plans.)

Spain’s 10-year bond yield jumped to over 7% again in response, and many Spanish banks were downgraded to junk status by Moodys.

2) Over in the US, the city of Stockton, California filed for bankruptcy this week… the largest so far, but certainly a mere drop in the proverbial bucket.

3) JP Morgan, considered to be among the few ‘good’ banks remaining in the US, conceded that the $2 billion loss they announced several weeks ago might actually be more like $9 billion.

4) The Federal Reserve reported yesterday that foreigners are reducing their holdings of US Treasuries.

5) Countries from Ukraine to Kazakstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves.

6) Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in renminbi.

7) China has further announced plans to create a special zone in Shenzhen, one of its wealthiest cities, to allow full exchange and convertibility of the renminbi.

8) World banking regulators from the Bank of International Settlements to the FDIC are proposing that gold bullion be treated as a risk-free cash equivalent by commercial banks.
So… what we can see from this week’s events is:
  • European governments are insolvent
  • European banks are insolvent
  • US governments are heading in that direction
  • Even the best US banks are not as strong as believed
  • Foreigners are abandoning the US dollar and seeking alternatives
  • Gold is money
These events are all connected, and the trend is becoming so clear that even the most casual observers are starting to wake up.
When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling.
No amount of self-delusion can make this go away.
Rational thinking and measured action, on the other hand, can make the consequences go away… turning people from victims into spectators of the greatest bubble burst in modern times.


Friday, June 22, 2012

Tough Week for Gold

A one day $50 drop in gold doesn't feel good. But keep a longer term outlook. The graph below is really all one needs to know about where the price of gold is headed:



Seems to be a pretty close correlation between US debt and the price of gold, no?

So ask yourself, "where is the US debt level going?"

And a bit of Friday humor:


Tuesday, June 19, 2012

More Gold is Leaving "The System"


Re-posted from TFMetals:

...All of that said, what we now know is this. Beginning some time ago, but continuing today at an accelerating pace, physical metal is being purchased in London and then delivered out of the system. Under "normal" circumstances, this is not necessarily unusual. The bullion banks simply expect this metal to return to them at some point, where it can be re-leased, re-hypothecated and re-delivered in the future. This is how it has worked for decades. However, this time it's different.
What I have learned and have since been able to confirm via a second source is this: London Good Delivery bars are being delivered to Eastern buyers. Instead of being vaulted inside the LBMA system, these bars are being sent directly to refiners. The bars are then being melted and recast in 1 kilogram sizes. The new bars are then being stamped with official, government insignia and sent on to vaults outside of the LBMA system and points east, never to return again. 
​What does this mean and why is this important? Quite clearly this information, if accurate, has several significant ramifications:
  • The Chinese and others are preparing for a new system. Whether it's simply a new gold pricing and delivery system to replace the LBMA/Comex or whether it's a new global trade settlement system that is guaranteed with gold is impossible to say, at this point. 
  • The physical gold supply of the LBMA and secondarily the Comex, much of which has been acquired/supplied through leasing, is being rapidly depleted and will not be coming back. 
  • The bullion banks, which have profited for years from leasing, trading, vaulting and the like, are about to feel the rather dramatic effects of this supply depletion.
As this pertains to the banks, last week I wrote this ( http://www.tfmetalsreport.com/blog/3893/still-pounding-away) and I think the auto dealer analogy is still a good one here. IF China and others are buying gold in London and IF the bullion banks are delivering to them leased and rehypothecated gold and IF the Chinese are taking this gold and melting it and IF they are then recasting it into non-LBMA, 1-kg bars, then the bullion banks have a serious problem on their hands. The delivered gold isn't coming back into "the system". It is no longer in "London Good Delivery" form. It's gone. For good.
My advice to you today is to ponder this information and its implications. Ask yourself these questions:
  • If you vault gold within the current system, do you really own it?
  • If the banks begin to scramble for physical metal, will paper price trade higher or lower?
  • If the Chinese and others are planning for a new, international trade settlement system to supplant the U.S. dollar as reserve currency, what does that mean for the future value of the dollar? What would that mean for the future value of all fiat currency? What would that mean for the future value of gold and silver?

Friday, June 15, 2012

Jim Willie Podcast @ TFMetals


TF Metals hosts Jim Willie for another podcast here.

Here's the executive summary for those who can't spare an hour to listen to the whole thing:


Jim Willie “Golden Jackass”

  • We could see the Euro stop trading on the FX markets.
  • We could see no quotes on COMEX for gold, only spot futures.
  • More “Bank Holidays” are coming in Spain & Italy.
  • SWIFT system being replaced resulting in a move away from dollars, killing the USD as global reserve currency.
  • There’s a new “Eastern Alliance” w/ Russia, China, Persian Gulf countries and (strangely) Germany.
  • Creation of a Euro-Mark, possibly backed by gold.
  • Russian Ruble backed by gold, oil, gas.
  • Could lead to US Fed as the only remainder buyer of Treasuries, leading to default.

On Gold manipulation:

  • US Fed is “Godfather” for group of US, Europe and Swiss Bankers.
  • JP Morgan is the execution arm of Federal Reserve.
  • Fed and Treasury coordinate the price of gold with currency exchange stabilization fund.
  • Physical gold buying is being done by Eastern interests “off market” when paper price is beaten down.
  • Big banks are being forced by Basil I and Basil II to sell gold to raise Tier 1 capital required by BIS. For a reminder on Tier I capital, the BIS and Basel click this link.
  • FASB change of accounting rules essentially allowed banks to “grade their own papers” on loan assets marking them to whatever value they wanted: Mark-to-fantasy instead of mark-to-market.

On Treasury bonds:

  • US Treasuries are a tower of Babel.
  • A collapse will occur progressively.
  • Not necessarily from higher interest rates.
  • 69% of all Treasuries last year were bought by THE FED!!!
  • Weimar meets Ponzi.
  • Treasuries are becoming “black hole” sucking in assets.
  • On the national debt:
  • Believes we have a crash because debt commission is dysfunctional.
  • Sees the US dollar split between foreign dollars and domestic dollars where foreign dollars are honored while domestic dollars are devalued 3 for 1.
  • Treasury yield curve will resemble the heart monitor of a dead man: flat-lined.

On more QE:

  • It never stopped.
  • Japan just had yet another QE, been going on forever.

Conclusion:

As long as there is QE & ZIRP (zero interest rates) the gold bull continues.
The real interest rates, zero minus inflation, is negative.

Thursday, June 14, 2012

The Stock Market's Rigged

Here's Mr. Biderman making several important points.

  • The stock market is rigged as the Fed tries to increase consumer confidence through the "wealth effect".
  • Nothing has changed since 2008, they are merely kicking the can down the road.
  • The economy is barely growing above inflation, if at all.
  • We are spending $1.3 Trillion in order to grow income $250 Billion, which is not sustainable.
  • We will see both inflation & deflation. 
Click here to watch video.

Two very importance points here that I've pointed out before.

  1. The market is an illusion and you should not trust the current valuations as the markets are completely manipulated and have no meaning. You may ask, "who cares, as long as the market is moving up"?  The reason is because the markets will eventually move back to their intrinsic value once the Fed runs out of the ability to juice it with more QE, loses all credibility, or both.
  2. We will see inflation and deflation simultaneously. Inflation in foodstuffs and fuel, the things we need to get by day to day. And deflation in the things that we define our wealth by: stocks bonds and real estate.
 Biderman's description of requiring $1.3 Trillion to create $250 Billion in higher wages is the very definition of a negative multiplier. The Keynesians like Paul Krugman along with the current administration have been operating on the assumption that more deficit spending was needed because it supposedly had a positive multiplier. They thought each dollar of additional spending would create $1.60 in economic activity. They have clearly been wrong and as a result we have spent $5 Trillion in new debt and are no really better off than we were at the beginning of this administration. The graph below clearly illustrates the difference between their assumptions and actual economic reality.



This explains why Christina Romer, Obama's economist, thought the stimulus she crafted for President Obama would keep unemployment below 8% when in reality it has never been below 8%.




This weekend, Greeks will go back to the polls for a new election to once again try to form a government. ...And the results may not be very good for markets. Several FX trading companies are warning clients against holding positions in the Euro over the weekend. The ten year Treasury just hit a record new low yield on high demand for safe assets (bond prices and yields move in opposite directions). And today, G20 announce they stand ready to act to stabilize markets if needed. This pushed stocks up today but its not good news.







Monday, June 11, 2012

Egon Von Greyerz on the View from Switzerland


 
  • Currencies and the stock market will continue down against gold.
  • Every world economic figure is looking worse.
  • The dominoes are falling.
  • Hyper-inflation (for food and fuel) & depression (decline in all assets financed, stocks, real estate, etc.)
  • Rating agencies avoiding US downgrade for political reasons.
  • Gold decline only in paper market.
  • There’s been no selling of physical gold.
  • Agrees with “London trader” about gold manipulation
  • Paper market is 100 times physical.
  • US printing is imminent.
  • Bernanke knows printing is needed right now.


From King World New:

On the heels of Spain asking for $125 billion to bail out their collapsing banking system, today Egon von Greyerz told King World News, “There will be a massive worldwide package coming out between the Fed, the ECB, the IMF and other central banks.”  Egon von Greyerz is founder and managing partner at Matterhorn Asset Management out of Switzerland.  Von Greyerz also said the money printing is “imminent.”  Here is what Greyerz had to say about the unfolding crisis:  “As I see things, we are on the road to perdition.  Eric, there is no exit strategy for the world (to get) out of these problems.  There is no solution.  If you look at what happened in 2008, people thought that was bad, but what’s going to happen, starting this year and in the next few years, will make 2008 look like a small rehearsal because the real collapse is going to start now.”


“We’re seeing every week, one domino after the next that is falling.  So far they are only smaller dominos such as banks, smaller countries, etc..  No (major) country has fallen, but that will come.  Every single economic figure is looking worse.  World trade is declining -- Chinese exports of steel were down 14% last month, US exports to the eurozone were down 5% last month and that is likely to increase to minus 20% if not more. 

The decline of world trade means the start of a depression....

“We also saw six German banks downgraded, we saw manufacturing figures in almost every country coming down, as well as production.  So the dominos are falling and, sadly, we are seeing a historic and dark period for the world.

Bernanke, don’t believe a word of what he is saying.  He’s a politician, like everybody else, and he used this speech to put pressure on Congress to reduce the deficit, but of course they won’t.  So the burden will be back on Bernanke to print more money.  That (money printing) is imminent.

Ben (Bernanke) talked about the eurozone.  He said he’s prepared to take action if needed.  Well, I can tell him that action is needed now.  That action we will see very soon.  There will be a worldwide package.  There will be a massive worldwide package coming out between the Fed, the ECB, the IMF and other central banks.”

Greyerz had this to say about the action in gold: “We saw no selling of physical gold, it was all manipulation in the paper market.  There is no selling in the physical market.  It’s very important to understand that there is manipulation of the paper market to a massive extent.  At some point people will not trust the paper market anymore.

There is only one direction for markets.  The stock market will continue down against gold, the currencies will collapse at a faster rate against gold, and gold will continue its long-term trend (higher) that we have seen over the last 12 years.

This is a chart I’ve produced for the written (portion of this interview).  You see the peak from August and early September of last year, and then a nine month consolidation.  It’s a triangle and the moves are getting smaller.


The support is around $1,560 on a weekly closing basis, and the resistance is $1,700.  We might hit $1,560 on a weekly closing basis or even go below it, but in my view the next move is up.

Wealth preservation (right now) is buying physical gold and storing it outside of the banking system.  That is the only way you can preserve your wealth in a scenario in which, sadly, there is no solution to what we are going to see in the next two years.  (This situation is) very, very sad, but that is the case.”

You can listen to the podcast here.