Archive for November 2009
by Ambrose Evans-Pritchard
Originally posted November 26th, 2009
STEPHEN JEN, FROM THE HEDGE FUND Blue Gold Capital has a warning for those who think that gold has risen far too high, is necessarily in a speculative bubble, and must soon come clattering back down.
Mr Jen is an expert on sovereign wealth funds from his days at Morgan Stanley. The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months.
Why should that stop when the AAA club of sovereign debtors is pushing towards the danger threshold of 100pc of GDP? These new players account for almost all the accumulation of foreign currency reserves worldwide over the last five years, so what they do matters enormously.
After crunching the numbers, Mr Jen found that the share of gold in their reserves is just 2.2pc compared to 38pc for the Old World (perhaps we should just call them the deadbeats from now on). They would have to buy $115bn of gold at current prices to raise their bullion to just 5pc of total reserves, and $700bn to reach just half western levels. The killer-term here is at current prices since any such move in the tiny global market for gold would send prices into the stratosphere.
Mr Jen says that you know where you are in the currency markets — more or less — because there are concepts of “fair value” used by experts. Ditto for the equity markets, where you have P/E ratios (warts and all I might add, since the actual reported P/E of the S&P 500 was a record 141 in September before the agency stopped publishing the figure — a far cry from the forward earnings in vogue).
How do we determine what fair value should be for gold? “We have no such concept,” he said. Actually, that is not quite true. You can use the dollar monetary base as a proxy.
Mr Jen said China alone accumulated $150bn in reserves in the third quarter, pushing the total to $2.3 trillion. These are colossal sums. China is amassing almost as much each month as the United States ($63bn) has built up in the entire history of the country. True, the US understates the value of its gold, but you get the picture. Something big is going on.
So far, China has just 1.7pc of its reserves in gold, or 34m troy ounces. I was told by a top Chinese official that they are buying on the dips so as not to crowd out the market, which means of course that gold cannot “crash” unless you think China itself is going to crash — or stop building reserves (which is possible: Albert Edwards from SocGen says China may be in current account deficit next year, leading to a yuan move — down, not up).
The gold proportions are: Hong Kong (0), Singapore (0), Korea (0.2), Brazil (0.6), India (4.8) after its shock purchase of IMF gold, and Russia (5.5). Yes, the West still has a lot in percentage terms — US (86), France (78), Italy (72), Switzerland (33), Germany (25) — but they don’t count for so much any more.
It is true that the Old World could meet demand for a while (a short while actually) by selling some of their gold. But will they do so? They did not use up their quota for the last year under the Washington accord. My own guess is that they too are wondering whether it makes any sense to keep selling metal in order to buy the fiat paper of the bankrupt peers (note that the Bank of England’s own pension fund has got rid of almost all its Gilts, buying inflation protection instead). Britain may become a net buyer of gold if the Conservative Party should come to power next year. [Which is a distinct possibility, or even probability –Aurick]
Bottom line: “The scope for EM central banks to buy more gold is substantial, if they choose to do so,” he wrote cautiously in a note to clients. Will they choose to do so?
“I suspect they will,” he told me. Personally, I have been feeling vertigo with gold near $1180. All my contrarian instincts cause me to dislike momentum stories — but there again, maybe this is not momentum. Perhaps it is a civilization shift. Can’t make up my mind.
INVESTORS BUY GOLD WHEN THERE is inflation and when there is a flight to quality. They buy gold when they no longer trust currencies, due to government or central bank profligacy. Due to those and other reasons gold has broken out to new highs. It could well be that gold may never see $1,000 again. Long ago the world’s central banks set the course for a planned collapse of the world economy to implement world government and there is now no turning back.
We have proof stretching back to 1965 that intervention by the Treasury and the Fed was taking place in the gold market. The illegal sale of gold on 10/19/87 was a good example of that. Then came the FOMC memos of the 1980s and 1990s to kill the perception that gold be allowed to reflect a policy of a weak dollar unbacked by gold. It is all there and probably more proof which our government and the Fed hides from us. We have to laugh at the smug who say why would the Treasury bother to rig the gold price? The point is they have and they are still doing it.
The perception now is that the massive stimulus put into international markets, especially US markets, will be withdrawn as interest rates are allowed to float upward. This stimulus was responsible for the stock market climbing from Dow 6600 to 10,500, a 60% leap built on monetization. If the punch bowl is removed the market will return to test 6600. In addition, the deflationary undertow kept at bay by the stimulus, will overcome monetary policy and the nation and the world will slip into monetary, deflationary depression.
by Dan Norcini
Originally posted: November 25, 2009
The surge by the Euro above major resistance centered near the 1.50 level with a corresponding break of downside support in the US Dollar and a move to a new yearly low, catapulted gold up to within easy striking distance of $1,200.00. If you recall our inflation adjusted gold price chart, a breach of that level on strong volume could take gold into an upside acceleration with a longer term target of $1,750 quite conceivable based solely on the chart pattern alone. It appears as if the $1200 level could fall early next week.
I find it more than disconcerting to see the complacency in the broad US equity markets regarding the near free fall in the Dollar. A falling dollar may generate some paper profits for US businesses, especially those in the export end of things, but it spells disaster for the US consumer, especially both the poor and the middle class, who have yet to understand what is going to happen to their purchasing power as the cost of the basic necessities of life begin an inexorable climb higher.
Remember how they quietly switched that 5 pound bag of sugar to a 4 pound bag and left the price the same? Well, get ready for another repeat of that – expect to see smaller bags and boxes of cereal, etc, but with the same sticker price as the former larger quantity size. Suzie Homemaker will be confused as she comes home from the grocery store with another $200 worth of goods but with far more room left in her cupboard after she unloads the bags.
Jim has said it many times – these derivative kings have destroyed us all. While we welcome the rise in gold, we despise the reasons for its rise because it could have been avoided. Now it is too late. The Dollar is finished as the global reserve currency and with its demise, so too goes the position of US preeminence in global economic affairs. As that fades, eventually military power will fade as well. Just like Rome declined, so too America is on the path of long term decline and believe me, it pains me deeply to have to write this.
Originally posted November 23, 2009
HOW INFANTILE IS AMERICAN SOCIETY? Last night’s CBS “Business Update” (in the midst of its “60 Minutes” program) featured three items: 1.) The New Moon teen vampire movie led the weekend box-office receipts; 2.) Cadbury shares hit an all-time high; 3.) Michael Jackson’s rhinestone-studded white glove sold at auction for $350,000. Some in-house CBS-News producer is responsible for this fucking nonsense. How does he or she keep her job? Is there no adult supervision at the network?
Meanwhile, over at The New York Times this morning, Paul “Nobel Prize” Krugman writes:
“Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts; the stimulus was too small, and it will fade out next year, while high unemployment is undermining both consumer and business confidence.”
Disclosure: I’m not one of the economists that Mr. Krugman talks to (nor am I an economist). But it’s sure interesting to know that the ones palavering with Mr. Krugman imagine that that the US can possibly return to an economy based on the fraudulent securitization of reckless debt. Does Mr. Krugman think that the production housing industry can resume paving over the nether exurbs with half-million-dollar houses (to be bought with no money down loans by the sheet-rockers working inside them)?
Does he think all those people receiving cancellation notices from their credit card issuers are in a position to flash their plastic at the Gallerias this Friday? Or ever will be again? Is he perhaps misusing the term “recovery?” After all, that is generally taken to mean resuming a prior state, which is, in turn, presumed to be a healthy prior state. Is that what the economy of the past decade was? And, incidentally, what exactly is a “consumer?” And why, at the highest levels of journalism in this land, do we refer to citizens that way? As if the American people have no other purpose except to buy things? Or is that the only way an “economist” can imagine them?
by Martin D. Weiss, Ph.D.
Originally posted November 23, 2009
IN THE SCENARIO I’M ABOUT to paint for you, the dialog is fictional, but all the facts and figures are real.
The time: 1 a.m., November 23, 2011, exactly two years from now.
The place: the White House, suddenly and unexpectedly under siege as a new financial crisis erupts.
The economic booms of 2010 have morphed into superbooms … the superbooms into bubbles … and the bubbles into busts.
Large banks are again on the brink. Financial markets are again in turmoil. Wall Street giants like Goldman Sachs, JPMorgan Chase, and Morgan Stanley — the outstanding survivors of an off-again-on-again debt crisis — are now its primary victims. Investments like long-term U.S. Treasury bonds — long sought as safe harbors — are now collapsing in price, turning into torpedoes that can sink even the sturdiest of portfolios. But most important, the government’s too-big-to-fail bailouts, shotgun mergers, and mad money printing — previously hailed as cures that killed the contagion of 2008 — are now widely viewed as far worse than any disease.
President Obama and Treasury Secretary Geithner have huddled in the Oval Office for hours, struggling to find new solutions to old problems: Wall Street meltdowns, renewed threats of a great depression, millions more thrown out of work. After a long and heated debate, the president slumps back into his armchair, signaling it’s time to talk more frankly — to reminisce about past policies and rethink what might have gone wrong.
“With 20-20 hindsight,” he remarks after an introspective pause, “it’s clear we were overly focused on the intended consequences of our efforts — the economic recovery, the bounceback in markets, the jobs saved. Meanwhile, we were blindsided by the unintended consequences, many of which have proven to be bigger, more durable and, ultimately, more impactful than the benefits we did achieve.”
The Treasury Secretary, weary from marathon meetings on precisely the same subject, nods in silent agreement. “So, perhaps one of our tasks,” continues the president, “should be to document two basic issues: What precisely are the unintended consequences? And what exactly did we do to cause them?”
“We don’t have to,” says Geithner sheepishly.
“Because it’s already been done. Those issues have already been thoroughly documented.”
“Since the fall of 2009. That’s when SIGTARP — the Special Inspector General for the Troubled Asset Relief Program — revealed the mistakes we made with the giant AIG bailout. And that’s also around the time the public began to react to the enormous contradiction between massive unemployment on Main Street and the monster we helped to create on Wall Street.”