28 January 2012
Tail Events, Isolation, the New Normal
By: Jim Willie
The year 2012 has started out in strange ways. While celestial forces augur for rare tail events, the assurance of man-made events that stretch far into the extreme tail of probability are not only very likely but will be of a type to reflect the change in the global balance of financial power. The Paradigm Shift mentioned over the course of the last two to three years is at work, having moved into a higher gear. The gold is moving from the West to the East, along with the power. We will not see the process reverse in our lifetime. The sanctions set against Iran have been devised by a former global leader nation that is beset by insolvency, fraud, and lost integrity. The backfire has consolidated forces into a more fortified position against the USDollar. Trade increasingly is not being settled in US$ terms. The icons of the day are mere apologist public address systems attempting to rationalize and justify the deep insolvency and wrecked systems. The new normal is of a caravan file of broken cars and trucks sputtering down the road, using the false fuel of hyper monetary inflation and the offensive paint of phony financial accounting, the tell-tale sign being the ugly rancid smoke out of their tailpipes. The last insult is of the US Presidential election process, which is badly marred by obvious inconsistencies and anomalies. The vote count for the candidate that attracts the biggest crowds, attracts the biggest donations from corporations, and defies the financially teetering system does not match the final official tallies.
Prepare for the Rare Damage of Tail Events
In the probability world, a tail event is described as an occurrence far out in the small numbers of probability, extended on the tail of the curve of likelihood. In the quality control domain, the battle cry used to be Six Sigma, meaning the tolerated defect rate goal would be six standard errors, a rate in no way achievable. A quick check of the probability tables unmasks the lofty goal as one defect part off the assembly line in every 1.013 billion items. That is Six Sigma on the normal bell-shaped curve. However, in the world of phony finagled finance, such rare events are indeed occurring. The modern world has never seen such grotesque charred ramparts posing as financial structures, badly beset by the insolvency caused by the natural sequence of broken asset bubbles, aggravated by absent industry. In fact, the entire fiat currency system, where money is nothing but redefined debt, is an abomination destined for the ruin we see on such a tragic widespread level. The modern world has never seen such grotesque housing disasters, the dream of home ownership turned upside down, one quarter of American households owing more than the value of their homes. In fact, the entire housing dependence devised by Greenspan, where the USEconomy would lean not on industry but on rising home equity, serves as the calling card of central bank heresy. The heresy continues with the high priest ZIRP and bishop QE. Of course it ended in tears. The modern world has never seen such grotesque quicksand in sovereign debt for so many major nations. This goes far beyond Greece, Ireland, and Portugal, the symbols of small fry nations that few nations will make deep sacrifice for. In fact, as the sovereign debt spreads, it has become clear that Italy, Spain, France, and many other nations suffer from the sinking pressures that national securitized debt brings. As the sovereign debt loses value, the banking system sheds reserves valuation and goes insolvent, the credit engines stall, the economy falls into recession, the labor force loses jobs, the spending patterns falter, and the nation goes into a failure mode. See the Cauchy distribution in the graphic, which when the degrees of freedom grow unbounded, approaches the Gaussian normal.
Some important tail events of rare type are coming. Any attempts to control a Greek Govt Bond default will be fraught with high risk and deep peril. The equal necessity to control a default for Ireland and Portugal will be made obvious. The extension to Italian and Spanish Govt Bond losses in collateral damage will be obvious. The implications to Credit Default Swaps must also be handled, not possible in the same fraudulent manner as before with redefinitions and denied insurance awards. The contagion of vanished equity in the banking system will spread to London, New York, and Germany, in whose nations numerous banks will fail. It will be extremely difficult for the USDollar to ward off such powerful storm damage, and remain as the global reserve currency. Some distant maritime voices might regard my claims as premature and far-fetched, but their preoccupation with gold basis has left their voices mere reverberant richochets in the hinterland. The academic voices seem out of touch with trends, the loud laps on the rocks from waves of inflation hardly recognized for their damage from the remote seacoast. They seem unable to foresee the new found land that is forming in the East, divorced from the USDollar.
Iran Sanctions Backfire into Isolation
In the last two weekly articles, the backfire was described regarding Iran sanctions, the response from the emerging economies, and the harmful effects of foreign nations grappling with defense from the uncontrollable unbridled unending printing of phony money. The USGovt actions have galvanized a response, led not by Iran but by China. The raft of bilateral accords juiced by currency swap agreements has provided a significant buoyancy in the global trade framework, a highly complex system. It dictates the flow of USDollars in obvious ways, but it also dictates the formation of reserve banking systems in more subtle ways. In 2007, when Brazil and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass took notice like a prairie dog raising his head with erect spine. In 2010, when Russia and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass took notice again. The big trade winds were changing direction. The extreme importance of trade and banking interwoven should not be overlooked, as often done by the clueless cast of US economists. So when in the last month, Japan and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass concluded that the end was near for the waterlogged American financial fortress. These are two primary Asian powerhouses, who with South Korea form the core strength of the entire East.
The USDollar might not be attacked on several fronts with harsh assaults so much as it will be relegated into irrelevance, as the USDollar will be ignored and left to defend itself in the open fields where wolves and dragons roam wild. Note the parallel to the COMEX, which as a market will also be relegated into irrelevance, as the precious metals will be traded elsewhere, in markets where private accounts are not stolen. Entire Compliance Departments have forbidden usage of the COMEX as of January, due to outlaws overrunning the floors. As the USEconomy is isolated, it will be compelled to bid up whatever foreign currency is required to purchase commodities and finished products. In reaction, the USDollar will fall in value.
The year 2012 has started out in strange ways. While celestial forces augur for rare tail events, the assurance of man-made events that stretch far into the extreme tail of probability are not only very likely but will be of a type to reflect the change in the global balance of financial power. The Paradigm Shift mentioned over the course of the last two to three years is at work, having moved into a higher gear. The gold is moving from the West to the East, along with the power. We will not see the process reverse in our lifetime. The sanctions set against Iran have been devised by a former global leader nation that is beset by insolvency, fraud, and lost integrity. The backfire has consolidated forces into a more fortified position against the USDollar. Trade increasingly is not being settled in US$ terms. The icons of the day are mere apologist public address systems attempting to rationalize and justify the deep insolvency and wrecked systems. The new normal is of a caravan file of broken cars and trucks sputtering down the road, using the false fuel of hyper monetary inflation and the offensive paint of phony financial accounting, the tell-tale sign being the ugly rancid smoke out of their tailpipes. The last insult is of the US Presidential election process, which is badly marred by obvious inconsistencies and anomalies. The vote count for the candidate that attracts the biggest crowds, attracts the biggest donations from corporations, and defies the financially teetering system does not match the final official tallies.
Prepare for the Rare Damage of Tail Events
In the probability world, a tail event is described as an occurrence far out in the small numbers of probability, extended on the tail of the curve of likelihood. In the quality control domain, the battle cry used to be Six Sigma, meaning the tolerated defect rate goal would be six standard errors, a rate in no way achievable. A quick check of the probability tables unmasks the lofty goal as one defect part off the assembly line in every 1.013 billion items. That is Six Sigma on the normal bell-shaped curve. However, in the world of phony finagled finance, such rare events are indeed occurring. The modern world has never seen such grotesque charred ramparts posing as financial structures, badly beset by the insolvency caused by the natural sequence of broken asset bubbles, aggravated by absent industry. In fact, the entire fiat currency system, where money is nothing but redefined debt, is an abomination destined for the ruin we see on such a tragic widespread level. The modern world has never seen such grotesque housing disasters, the dream of home ownership turned upside down, one quarter of American households owing more than the value of their homes. In fact, the entire housing dependence devised by Greenspan, where the USEconomy would lean not on industry but on rising home equity, serves as the calling card of central bank heresy. The heresy continues with the high priest ZIRP and bishop QE. Of course it ended in tears. The modern world has never seen such grotesque quicksand in sovereign debt for so many major nations. This goes far beyond Greece, Ireland, and Portugal, the symbols of small fry nations that few nations will make deep sacrifice for. In fact, as the sovereign debt spreads, it has become clear that Italy, Spain, France, and many other nations suffer from the sinking pressures that national securitized debt brings. As the sovereign debt loses value, the banking system sheds reserves valuation and goes insolvent, the credit engines stall, the economy falls into recession, the labor force loses jobs, the spending patterns falter, and the nation goes into a failure mode. See the Cauchy distribution in the graphic, which when the degrees of freedom grow unbounded, approaches the Gaussian normal.
Iran Sanctions Backfire into Isolation
In the last two weekly articles, the backfire was described regarding Iran sanctions, the response from the emerging economies, and the harmful effects of foreign nations grappling with defense from the uncontrollable unbridled unending printing of phony money. The USGovt actions have galvanized a response, led not by Iran but by China. The raft of bilateral accords juiced by currency swap agreements has provided a significant buoyancy in the global trade framework, a highly complex system. It dictates the flow of USDollars in obvious ways, but it also dictates the formation of reserve banking systems in more subtle ways. In 2007, when Brazil and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass took notice like a prairie dog raising his head with erect spine. In 2010, when Russia and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass took notice again. The big trade winds were changing direction. The extreme importance of trade and banking interwoven should not be overlooked, as often done by the clueless cast of US economists. So when in the last month, Japan and China announced a swap facility to bypass the USDollar in trade settlement, the Jackass concluded that the end was near for the waterlogged American financial fortress. These are two primary Asian powerhouses, who with South Korea form the core strength of the entire East.
The USDollar might not be attacked on several fronts with harsh assaults so much as it will be relegated into irrelevance, as the USDollar will be ignored and left to defend itself in the open fields where wolves and dragons roam wild. Note the parallel to the COMEX, which as a market will also be relegated into irrelevance, as the precious metals will be traded elsewhere, in markets where private accounts are not stolen. Entire Compliance Departments have forbidden usage of the COMEX as of January, due to outlaws overrunning the floors. As the USEconomy is isolated, it will be compelled to bid up whatever foreign currency is required to purchase commodities and finished products. In reaction, the USDollar will fall in value.
Friday Fraud Transitioning Into Friday Perfection
Now for the good stuff. Below is a 1-yr daily chart of the price of gold. Those of you who are familiar with doing technical analysis on stock charts will recognize this particular chart as being nothing less than bull market full-on chart pornography. When gold breaks above $1800, we will really be off to the races. I think gold is going to make some moves to the upside that will shock most gold bears and surprise many bulls.
Living In A QE World
By James Bianco - January 27th, 2012, 8:15AM
All Central Bank Balance Sheets Are Exploding Higher, Or Engaged In QE
The degree to which central banks around the world are printing money is unprecedented.
The first eight charts below show the balance sheets of the largest central banks in the world. They are the European Central Bank (ECB), the Federal Reserve (Fed), the Bank of Japan (BoJ), the Bank of England (BoE), the Bundesbank (Germany), the Banque de France, the People’s Bank of China (PBoC) and the Swiss National Bank (SNB). Noted on the charts are significant events or growth rates.
Shown is the size of each respective balance sheet in its local currency. Note that all are exploding higher as every chart goes from the lower left to the upper right. Most are still making new all-time highs. If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.
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Click to enlarge:
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The degree to which central banks around the world are printing money is unprecedented.
The first eight charts below show the balance sheets of the largest central banks in the world. They are the European Central Bank (ECB), the Federal Reserve (Fed), the Bank of Japan (BoJ), the Bank of England (BoE), the Bundesbank (Germany), the Banque de France, the People’s Bank of China (PBoC) and the Swiss National Bank (SNB). Noted on the charts are significant events or growth rates.
Shown is the size of each respective balance sheet in its local currency. Note that all are exploding higher as every chart goes from the lower left to the upper right. Most are still making new all-time highs. If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.
>
Click to enlarge:
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Is the Fed Cranking Up the Presses Again?
Dear Reader,
Vedran Vuk here, filling in for David Galland. Today we'll cover a number of topics, most importantly Bud Conrad's coverage of the Fed's announcement on Wednesday. For a while, investors were basically allowed to sleep through these Federal Open Market Committee statements – we get it; they're keeping rates low. However, this meeting had a few key points that should stir investors from their slumber. I'll start with a discussion about the weakening core of European nations. Then I'll return to touch on other topics of interest.
By Vedran Vuk, Senior Analyst
While the euro crisis has taken a momentary breather, let's not forget the even bigger dangers on the horizon. We've all seen the spreads between the PIIGS and German bonds. Needless to say, they aren't pretty. But another chart is scaring me even more at the moment: It's the 10-year bond spread between Germany and France:
That should come as no surprise. The rest of Europe has been following the exact same path as Greece, Portugal, Spain, and all the other "bad guys." It's the same story of excessive spending programs, disastrous labor laws, and widespread government interventions. In fact, the European core must necessarily experience the same problems. If you're following the same stupid policies, you should expect the same bad results. It's logically inconsistent to think that certain policies are absolute failures in Greece while they magically work in France.
The only difference is that the core countries have been able to afford their programs thus far. Countries such as Greece aren't following a unique Greek policy agenda. Instead, Greece essentially tried to mimic Western European policies on an Eastern European budget. Unfortunately, that just doesn't work… but those policies won't work for Western Europe in the long run either.
Now don't get me wrong: I'm not saying that France or some of the other core countries are going into a crisis. I'm just pointing out that the cracks are starting show. If Europe can't shake its obsession with the welfare state, I have little doubt that some of the biggest European countries will be the PIIGS of tomorrow. They're walking the same path as Greece, Ireland, Italy, and Portugal. But because of their stronger economies, they are taking this stroll at a much slower pace while the PIIGS are sprinting toward the end of the road… and the cliff waiting there. Though one country is running for the cliff and the other is walking, make no mistake – they're both on the exact same path.
But let's put this in perspective for now. The spread over German bonds is a little above one percent. This isn't the end of the world. In fact, it's very far from it, and considering all the problems in Europe, I'd still much rather hold French bonds than many other options. However, there are a few important things to take away from this situation. The spread between French and German bonds can teach us an important lesson about US interest rates.
Vedran Vuk here, filling in for David Galland. Today we'll cover a number of topics, most importantly Bud Conrad's coverage of the Fed's announcement on Wednesday. For a while, investors were basically allowed to sleep through these Federal Open Market Committee statements – we get it; they're keeping rates low. However, this meeting had a few key points that should stir investors from their slumber. I'll start with a discussion about the weakening core of European nations. Then I'll return to touch on other topics of interest.
Cracks in the European Core
By Vedran Vuk, Senior AnalystWhile the euro crisis has taken a momentary breather, let's not forget the even bigger dangers on the horizon. We've all seen the spreads between the PIIGS and German bonds. Needless to say, they aren't pretty. But another chart is scaring me even more at the moment: It's the 10-year bond spread between Germany and France:
(Click on image to enlarge)
The media always want to frame financial news in the classical sense: the good guys versus the bad guys. In this case, it's the responsible and prudent core of Europe versus the lazy and uncontrollable PIIGS. However, the chart above tells a different story. The crisis has reached the core itself. Rather than being an impenetrable fortress, countries such as France have their own problems.That should come as no surprise. The rest of Europe has been following the exact same path as Greece, Portugal, Spain, and all the other "bad guys." It's the same story of excessive spending programs, disastrous labor laws, and widespread government interventions. In fact, the European core must necessarily experience the same problems. If you're following the same stupid policies, you should expect the same bad results. It's logically inconsistent to think that certain policies are absolute failures in Greece while they magically work in France.
The only difference is that the core countries have been able to afford their programs thus far. Countries such as Greece aren't following a unique Greek policy agenda. Instead, Greece essentially tried to mimic Western European policies on an Eastern European budget. Unfortunately, that just doesn't work… but those policies won't work for Western Europe in the long run either.
Now don't get me wrong: I'm not saying that France or some of the other core countries are going into a crisis. I'm just pointing out that the cracks are starting show. If Europe can't shake its obsession with the welfare state, I have little doubt that some of the biggest European countries will be the PIIGS of tomorrow. They're walking the same path as Greece, Ireland, Italy, and Portugal. But because of their stronger economies, they are taking this stroll at a much slower pace while the PIIGS are sprinting toward the end of the road… and the cliff waiting there. Though one country is running for the cliff and the other is walking, make no mistake – they're both on the exact same path.
But let's put this in perspective for now. The spread over German bonds is a little above one percent. This isn't the end of the world. In fact, it's very far from it, and considering all the problems in Europe, I'd still much rather hold French bonds than many other options. However, there are a few important things to take away from this situation. The spread between French and German bonds can teach us an important lesson about US interest rates.
If The Economy Is Improving….
Everywhere you turn these days, someone is proclaiming that the economy is improving. Barack Obama is endlessly touting the "improvement" in the economy, the mainstream media is constantly talking about "the economic recovery" and an increasing number of Americans seem to be buying into this line of thinking. A new NBC/Wall Street Journal poll found that 37 percent of Americans believe that the economy will improve over the next year, while only 17 percent of Americans believe that it will get worse. But is the economy actually improving? Not really. At the moment things are relatively stable. Some economic statistics are improving slightly and some continue to get even worse. However, it is very important to keep in mind that one of the biggest reasons why things have stabilized is because the federal government is pumping more than a trillion dollars a year into the economy that it does not have. The Obama administration is engaging in a debt binge unlike anything America has ever seen before, and yet many economic indicators are still in decline. So what is going to happen when the federal government stops injecting gigantic waves of borrowed money into the economy? That is a frightening thing to think about. The best efforts of our "leaders" in Washington D.C. are not accomplishing a whole lot. The Federal Reserve has pushed interest rates as low as they can go and the federal government is spending unprecedented amounts of money. But even with the federal government and the Federal Reserve pushing the accelerator all the way to the floor, the economy is still not improving much at all. Millions upon millions of Americans out there are anticipating some sort of a "great economic recovery", and they are going to be bitterly disappointed.But right now there are some "bright spots" in the economy, and you are bound to run into family and friends that will repeat to you the nonsense that they are hearing on the television about how the economy is recovering.
When they try to convince you that the economy is getting better, ask them these questions....
If the economy is getting better, then why did new home sales in the United States hit a brand new all-time record low during 2011?
If the economy is getting better, then why are there 6 million less jobs in America today than there were before the recession started?
It's Only $1.2 Trillion, So No U.S. Treasury Press Release
Friday, January 27, 2012 - 16:02 - By Denny Gulino
WASHINGTON (MNI) - The hour has almost arrived for an important bookeeping entry at the U.S. Treasury Department, the notation that from this day forward the U.S. government can borrow another $1.2 trillion.
Don't look in your inbox for that email from Treasury alerting the world at the close-of-business trigger time. There won't be any, the department said.
Such is the charged political atmosphere in Washington in a presidential election year, the White House appears not to want to again remind anyone of the huge amount of borrowing that is routinely necessary to keep government operating. And Republicans apparently do not want to again showcase the fact there is nothing they can do about it.
Neither side has hesitated in the past when they want to trumpet their battles, stick to their positions and fight to almost their last breath about whether the country should pay its bills. Standard & Poor's memorialized that kind of intransigence late last year, awarding Congress the blame for the first downgrade of U.S. sovereign debt.
Getting past that Capitol Hill trench warfare meant both sides reluctantly agreeing to a short-term fix to the paralysis over further borrowing. In three steps the White House would get its borrowing power, enough to last past the election into early 2013. The third step is Friday's quiet $1.2 trillion that will show up on the daily report of Treasury cash balances Monday.
WASHINGTON (MNI) - The hour has almost arrived for an important bookeeping entry at the U.S. Treasury Department, the notation that from this day forward the U.S. government can borrow another $1.2 trillion.
Don't look in your inbox for that email from Treasury alerting the world at the close-of-business trigger time. There won't be any, the department said.
Such is the charged political atmosphere in Washington in a presidential election year, the White House appears not to want to again remind anyone of the huge amount of borrowing that is routinely necessary to keep government operating. And Republicans apparently do not want to again showcase the fact there is nothing they can do about it.
Neither side has hesitated in the past when they want to trumpet their battles, stick to their positions and fight to almost their last breath about whether the country should pay its bills. Standard & Poor's memorialized that kind of intransigence late last year, awarding Congress the blame for the first downgrade of U.S. sovereign debt.
Getting past that Capitol Hill trench warfare meant both sides reluctantly agreeing to a short-term fix to the paralysis over further borrowing. In three steps the White House would get its borrowing power, enough to last past the election into early 2013. The third step is Friday's quiet $1.2 trillion that will show up on the daily report of Treasury cash balances Monday.
Episode 242
In this episode, Max Keiser and co-host, Stacy Herbert, discuss the State of the Banana Republic, the blowout at Apple with its profits “trapped” overseas and the gloomy State of the Stiff Upper Lip as UK family debts soar by nearly 50%. And, finally, Max and Stacy examine a proposal that bankers like Goldman Sachs’ Lloyd Blankfein and JP Morgan's Jamie Dimon, should compete like strippers on the open job market.
Portugal 10 yr bond at 15%/Private PSI deal in Greece a non starter/USA raises debt ceiling to 16.4 trillion
Good evening Ladies and Gentlemen;
Gold closed up today for the second straight day to the tune of $26.50 to finish the comex session at $1726.30. Silver followed her older and wiser cousin by 61 cents to $33.70. Today is options expiry so this day had saw some early resistance from the bankers but not much. Gold and silver are being viewed as a safe haven with all the noise of sovereign defaults. Today Portugal saw its 10 yr bond rise above 15% signalling that it too will join Greece in bankruptcy momentarily. Japan for the first time saw a trade deficit as the nuclear damage is certainly having an effect on their economy.
Let us now head over to the comex and assess trading, inventory movements and amounts of metal standing.
The total gold comex OI fell by 7965 contracts despite gold's big advance. Many bankers jumped ship with the news yesterday that the USA Fed policy is for ZIRP to continue to 2014. As far as I am concerned, it will continue to infinity. The front options expiry month of January saw its OI rise by 51 contracts despite only 1 delivery notice yesterday. We thus gained 50 contracts or 5000 oz of additional gold standing. The front delivery month of February saw its OI contract from 121,002 to 110,512 as all of these players rolled into April. The estimated volume today was a monstrous 316,070 contracts. The confirmed volume yesterday was also huge at 323,392. It seems that many are trying to locate as much physical as possible.
The total silver comex OI certainly did not follow in the footsteps of its older and wiser cousin, gold. Here the OI fell by 509 contracts from 103,025 to 102,516 despite the huge advance in silver yesterday and today. It looks like we had a few post-mortems for our bankers today. The front options expiry month of January saw its OI rise by 43 contracts despite 34 delivery notices. Thus 77 contracts or 385,000 additional oz of silver are standing in January. The next big delivery month is March and here we saw the OI remain relatively constant at 51,142 dropping by a little less than 500 contracts. The estimated volume today was very weak at 37,154. The confirmed volume yesterday was a lot better coming in at 55,886.
I have been telling you that the silver comex has been trading differently to gold for at least the last 3 months.
It seems that the high frequency traders are almost the entire volume at the comex and these guys are nothing but day traders. Thus silver can move in monstrous directions as the remaining longs are by definition are strong in nature and cannot be suckered into selling. The other issue is that Butler believes now that JPMorgan is now liquidating its short position and will soon be going long. This will be the end game as nobody will supply the paper short.
(courtesy ted Butler from his paid subscription. Special thanks to Ted and Ed Steer)
"If JPMorgan is not selling but is, in fact, buying, then a very different scenario could develop, similar to how I have speculated in the past. If JPMorgan is buying and not the technical funds, then a very different and bullish scenario emerges. If JPMorgan decides not to put its head back into the lion’s mouth and withdraws from manipulating silver, then a new silver chapter may have begun. Let me be clear – there is no way of determining for sure who is buying and selling today and this past Friday; only future COTs will reveal that. If it turns out that JPMorgan is buying back more of its short position on these rallies that would suggest much higher prices to come and maybe real soon. This goes to the heart of the silver manipulation. Take away the big silver short and you should take away the manipulation itself. I’m not saying that is the case, just that it might be. I would play it, as I always do, like it may be the end of the manipulat ion, simply because if it is, there will be little likelihood of second chances to get on board easily."
"That’s not to say that the commercials will roll over and play dead. I sense a profound lack of true liquidity since the MF Global disaster, in which the HFT operators are now responsible for an even higher share of total volume than before. I think that the HFT share of silver volume has approached 100% at times recently, rendering the silver market to its most illiquid state in my experience. More than anything else, this low true liquidity environment is behind the price spikes of Friday and today. In such a low liquidity environment we must be prepared for more price volatility, not less. We must be prepared for whatever may come, but we must also hang on to silver positions like never before. Be prepared for volatility that will rattle your bones. But volatility is a two-way street and up is one of the ways. So is up big."
end
Volcker confirms central bank need to suppress gold to stabilize exchange rates at 'critical point'
Submitted by cpowell on Thu, 2012-01-26 20:50. Section: Daily Dispatches
2:09p ET Thursday, January 26, 2012
Dear Friend of GATA and Gold:
Former Federal Reserve Chairman Paul Volcker today defended government intervention in the gold market to counter "exchange rate instability at a critical point."
Volcker's comments came in response to inquiry from the German freelance journalist Lars Schall, who noted GATA's reference to Volcker's expression of regret, recorded in his memoirs, about the failure of Western central banks to intervene to suppress gold prices during a currency revaluation in 1973. Volcker's support of gold price suppression was cited by your secretary/treasurer in his address to the Vancouver Resource Investment Conference last Saturday:
http://www.gata.org/node/10909
In his comments to Schall today, Volcker added that, "to the best of my knowledge," the United States has not intervened in the gold market for more than 40 years.
Nevertheless, the former Fed chairman confirmed the profound interest central banks have in the price of gold because of its effect on the currency markets, an interest that may justify intervention at any "critical point."
This contradicts oft-repeated assertions by certain gold market analysts, like Kitco's Jon Nadler, that central banks have no interest in manipulating the gold market:
http://www.gata.org/node/8717
Schall's initiative demonstrates what is so lacking in the mainstream financial media. He tracked down a central banker, put the gold price manipulation question to him, and got a noteworthy answer on the record -- a feat not yet attempted by, for example, the Financial Times, The Wall Street Journal, The New York Times, Reuters, Bloomberg News, the Associated Press, and on and on.
Imagine the news that might result from persistent questioning of central bankers in public about market intervention. Of course that's exactly why it's seldom done or permitted.
Schall's account of his search for Volcker is appended.
2:09p ET Thursday, January 26, 2012
Dear Friend of GATA and Gold:
Former Federal Reserve Chairman Paul Volcker today defended government intervention in the gold market to counter "exchange rate instability at a critical point."
Volcker's comments came in response to inquiry from the German freelance journalist Lars Schall, who noted GATA's reference to Volcker's expression of regret, recorded in his memoirs, about the failure of Western central banks to intervene to suppress gold prices during a currency revaluation in 1973. Volcker's support of gold price suppression was cited by your secretary/treasurer in his address to the Vancouver Resource Investment Conference last Saturday:
http://www.gata.org/node/10909
In his comments to Schall today, Volcker added that, "to the best of my knowledge," the United States has not intervened in the gold market for more than 40 years.
Nevertheless, the former Fed chairman confirmed the profound interest central banks have in the price of gold because of its effect on the currency markets, an interest that may justify intervention at any "critical point."
This contradicts oft-repeated assertions by certain gold market analysts, like Kitco's Jon Nadler, that central banks have no interest in manipulating the gold market:
http://www.gata.org/node/8717
Schall's initiative demonstrates what is so lacking in the mainstream financial media. He tracked down a central banker, put the gold price manipulation question to him, and got a noteworthy answer on the record -- a feat not yet attempted by, for example, the Financial Times, The Wall Street Journal, The New York Times, Reuters, Bloomberg News, the Associated Press, and on and on.
Imagine the news that might result from persistent questioning of central bankers in public about market intervention. Of course that's exactly why it's seldom done or permitted.
Schall's account of his search for Volcker is appended.
Fear Index shows that gold is undervalued
2012-JAN-24
James Turk has been writing about the Fear Index for years, as you can see in James Turk’s Free Gold Money Report.
The year 2011 ended on a very weak note for the price of gold, which tested support near the lowest levels since August as the precious metal slid below $1,550. This movement even drove the GoldMoney Fear Index below 3% as US M3 continued to rise, surpassing $14.4 Trillion. The downward path of gold since the September highs immediately prompted cries that the "bubble was bursting" from every corner of the financial press.
They could not be more wrong.
Neither a rising price, nor anecdotal reports of increased buying are in any way proper evidence of a bubble. If we ignore the chatter and actually look at empirical data, it is quite easy to recognise a speculative bubble or mania. That is to say, an irrational and unsustainable overvaluation of an asset regardless of fundamentals, reinforced by the belief that it will continue to rise indefinitely. We have a number of very vivid examples in living memory: the dotcom bubble, the housing bubble, and history provides many more examples, John Law's Mississippi Bubble being the classic example.
A strict definition of a speculative bubble will therefore have two basic parts to it:
1. Irrational overvaluation. 2. Mass participation.
It is not enough for prices to go up, they must go up beyond what is justified by value. There must also be a psychological "herd" effect. If only a small minority takes part, it is difficult for a self-reinforcing feedback loop to happen. We've already explained how participation in the gold market remains the province of a tiny minority, even including all the "paper gold" instruments.
The importance of the GoldMoney Fear Index lies in answering the first question: What is the value of gold? As we've said before gold must be compared to its peers- other forms of money- in this case the US Dollar.
The chart's message is powerful, the amount of dollars in circulation is still huge compared to the amount of gold that used to, barely 40 years ago, back them and give them the credibility necessary to become the world's reserve currency.
James Turk has been writing about the Fear Index for years, as you can see in James Turk’s Free Gold Money Report.
The year 2011 ended on a very weak note for the price of gold, which tested support near the lowest levels since August as the precious metal slid below $1,550. This movement even drove the GoldMoney Fear Index below 3% as US M3 continued to rise, surpassing $14.4 Trillion. The downward path of gold since the September highs immediately prompted cries that the "bubble was bursting" from every corner of the financial press.They could not be more wrong.
Neither a rising price, nor anecdotal reports of increased buying are in any way proper evidence of a bubble. If we ignore the chatter and actually look at empirical data, it is quite easy to recognise a speculative bubble or mania. That is to say, an irrational and unsustainable overvaluation of an asset regardless of fundamentals, reinforced by the belief that it will continue to rise indefinitely. We have a number of very vivid examples in living memory: the dotcom bubble, the housing bubble, and history provides many more examples, John Law's Mississippi Bubble being the classic example.
A strict definition of a speculative bubble will therefore have two basic parts to it:
1. Irrational overvaluation. 2. Mass participation.
It is not enough for prices to go up, they must go up beyond what is justified by value. There must also be a psychological "herd" effect. If only a small minority takes part, it is difficult for a self-reinforcing feedback loop to happen. We've already explained how participation in the gold market remains the province of a tiny minority, even including all the "paper gold" instruments.
The importance of the GoldMoney Fear Index lies in answering the first question: What is the value of gold? As we've said before gold must be compared to its peers- other forms of money- in this case the US Dollar.
Central-Bank Gold: Joining the Dots
By: Adrian Ash | Fri, Jan 27, 2012
Yes, central banks are holding more gold. But they're holding very much more wood-pulp on top...
The gold price on Wednesday broke up through the downtrend starting at last summer's record high. Or so a technical analyst studying the price chart would tell you.
But just as in late 2007 - from where gold began a 55% run inside 6 months - this week the price of gold bullion jumped on news that is fundamental: the price of money, specifically Dollars, the world's #1 currency for trade and central-bank reserves.
Back in 2007, the catalyst came as a baby-step rate cut of 0.25%, signaling the Fed's switch from raising to destroying the returns paid on cash savings. Now the Fed's new zero-rate promise "took gold comfortably clear of the 50, 100 and 200-day moving averages, and opened up some big targets to the upside," says one London technician. The previous ceiling of $1700 has become a support level according to bullion bank
Scotia Mocatta, "with further key support at the 200-day moving average at $1645."
Whatever you make of such numbers, it's worth stepping back to see the wood for the trees. Because the trend in who's buying gold, and why, is so plain to spot that you hardly need join the dots.
Gold bullion holdings amongst the world's central banks, for instance, have risen to a 6-year high, according to data compiled by the International Monetary Fund. Emerging and developing nations have swollen their gold reserves 25% by weight since 2008. The debt-heavy West is a net seller, but only just.
The gold price on Wednesday broke up through the downtrend starting at last summer's record high. Or so a technical analyst studying the price chart would tell you.
But just as in late 2007 - from where gold began a 55% run inside 6 months - this week the price of gold bullion jumped on news that is fundamental: the price of money, specifically Dollars, the world's #1 currency for trade and central-bank reserves.
Back in 2007, the catalyst came as a baby-step rate cut of 0.25%, signaling the Fed's switch from raising to destroying the returns paid on cash savings. Now the Fed's new zero-rate promise "took gold comfortably clear of the 50, 100 and 200-day moving averages, and opened up some big targets to the upside," says one London technician. The previous ceiling of $1700 has become a support level according to bullion bank
Scotia Mocatta, "with further key support at the 200-day moving average at $1645."Whatever you make of such numbers, it's worth stepping back to see the wood for the trees. Because the trend in who's buying gold, and why, is so plain to spot that you hardly need join the dots.
Gold bullion holdings amongst the world's central banks, for instance, have risen to a 6-year high, according to data compiled by the International Monetary Fund. Emerging and developing nations have swollen their gold reserves 25% by weight since 2008. The debt-heavy West is a net seller, but only just.
Prepare for Greece to Leave Eurozone; German Government Calls for Greece to Cede Sovereignty Over Tax and Spending Decisions to Eurozone "Budget Commissioner"; Text of the German Demands
MISH'S
Global Economic
Trend Analysis
Prepare for Greece to exit the Eurozone. Germany has made a request that in my opinion practically guarantees that outcome. The Financial Times has a pair of articles on the matter but the conclusion above is mine.
German Government Calls for Greece to Cede Sovereignty to Eurozone "Budget Commissioner"
Please consider Call for EU to Control Greek Budget
The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.
Global Economic
Trend Analysis
Prepare for Greece to exit the Eurozone. Germany has made a request that in my opinion practically guarantees that outcome. The Financial Times has a pair of articles on the matter but the conclusion above is mine.
German Government Calls for Greece to Cede Sovereignty to Eurozone "Budget Commissioner"
Please consider Call for EU to Control Greek Budget
The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.
Greek Debt Solution Likely to Trigger Credit Default Swaps
MISH'S
Global Economic
Trend Analysis
European finance ministers and politicians have come to the conclusion that a deal, even one involving a credit event, is better than no deal at all. Thus it is increasingly likely the Greek Debt Wrangle will trigger credit default swaps.
Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.
Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts
“Politicians seem less concerned than before about CDS triggers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”
Global Economic
Trend Analysis
European finance ministers and politicians have come to the conclusion that a deal, even one involving a credit event, is better than no deal at all. Thus it is increasingly likely the Greek Debt Wrangle will trigger credit default swaps.
Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.
Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts
“Politicians seem less concerned than before about CDS triggers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London. “Having a payout on Greek CDS is probably better than the alternative: a loss in market faith of the product’s ability to provide a hedge against sovereign risk.”
SilverDoctors: Chris Duane Selling Everything But the Kitchen Sin...
SilverDoctors: Chris Duane Selling Everything But the Kitchen Sin...: Our friend Chris Duane from Dont-tread-on.me tells the Financial Survival Network that he is literally selling everything but the kitchen si...
SilverDoctors: Silver COT Report: Commercials Increase Silver Sho...
SilverDoctors: Silver COT Report: Commercials Increase Silver Sho...: The commercials increased their futures short position in silver by a net 4,639 contracts (23.2 million ounces) in the week ending 1/24/12. ...
The relationship between central banks and gold
By Richard ZimmermanGold seems to make fresh news headlines every day, and there is plenty of active desire to know the price. Like most commodities, that price is based upon changes in the forces of supply and demand. Gold is different: First because gold production is comparatively stable and unlikely to change much in the near future, and second because the supply and demand remains very liquid, although at times very sensitive and subject to rapid changes.
Much demand for gold characteristically comes from investors and buyers of gold jewelry. Investors frequently favor gold as a store of value during times of economic stress. There is another large holder of gold deposits: Central banks in their reserves. Let's review how much gold there is in central banks and what actions to expect by those who own it.
The role that central banks play is not always clear. They exist to manage a nation's currency. They perform this function by controlling their country's supply of money and thus influence interest rates by their actions. There are other tricks they can perform (quantitative easing comes to mind) but while they continue to own vast amounts of gold holdings, they do not use the gold standard any longer. Instead they maintain gold reserves as credibility, preferring to exchange currencies with one another. Do you remember the old axiom that "money doesn't grow on trees"? It doesn't; it gets created by central banks. The gold they hold is more of a backstop, or last line of defense.
What about that central bank gold; what do they do with it? In the currently financially stressed macro environment what actions might central banks take?
Summary
Even without the gold standard in force, gold still has retained an important function among central banks. It serves as a desirable backstop of last resort among global monetary reserves. Gold is exchangeable, and that quality keeps it the ultimate reserve currency, even among central banks. Decisions made by central banks influence money supply, relate to interest rates moves, and economic growth. Investors are now seeing financial stresses that make gold a desirable investment, even among other central banks. For now, expect European central banks to hang on to the gold they have. Meanwhile the entire available supplies of gold in the world, including all that is held privately is nothing when compared to the amounts of paper gold and underwritten risk in the global financial derivatives markets. But that's another story.
Much demand for gold characteristically comes from investors and buyers of gold jewelry. Investors frequently favor gold as a store of value during times of economic stress. There is another large holder of gold deposits: Central banks in their reserves. Let's review how much gold there is in central banks and what actions to expect by those who own it.
The role that central banks play is not always clear. They exist to manage a nation's currency. They perform this function by controlling their country's supply of money and thus influence interest rates by their actions. There are other tricks they can perform (quantitative easing comes to mind) but while they continue to own vast amounts of gold holdings, they do not use the gold standard any longer. Instead they maintain gold reserves as credibility, preferring to exchange currencies with one another. Do you remember the old axiom that "money doesn't grow on trees"? It doesn't; it gets created by central banks. The gold they hold is more of a backstop, or last line of defense.
What about that central bank gold; what do they do with it? In the currently financially stressed macro environment what actions might central banks take?
Summary
Even without the gold standard in force, gold still has retained an important function among central banks. It serves as a desirable backstop of last resort among global monetary reserves. Gold is exchangeable, and that quality keeps it the ultimate reserve currency, even among central banks. Decisions made by central banks influence money supply, relate to interest rates moves, and economic growth. Investors are now seeing financial stresses that make gold a desirable investment, even among other central banks. For now, expect European central banks to hang on to the gold they have. Meanwhile the entire available supplies of gold in the world, including all that is held privately is nothing when compared to the amounts of paper gold and underwritten risk in the global financial derivatives markets. But that's another story.
'The truth behind the silver market'
By Eric Sprott & David Baker
As we approach the end of 2011, the Silver spot price has admittedly endured a tougher road than we would have expected. And let's be honest -- what investment firm on Earth has pounded the table on silver harder than we have?
After the orchestrated silver sell-off in May 2011, silver promptly rose back to US$40/oz where it consolidated nicely, only to drop back below US$30 within a two-week span in late September.
The September sell-off was partly due to the market's disappointment over Bernanke's Operation Twist, which sounded interesting but didn't involve any real money printing. Like the May sell-off before it, however, it was also exacerbated by a seemingly needless 21% margin rate hike by the CME on Sept. 23, followed by a 20% margin hike by the Shanghai Gold Exchange -- the CME's counterpart in China, three days later.
The paper markets still dictate the spot market for physical gold and silver. When we talk about the "paper market," we're referring to any paper contract that claims to have an underlying link to the price of gold or silver, and we're referring to contracts that are almost always levered.
It's highly questionable today whether the paper market has any true link to the physical market for gold and silver, and the futures market is the most obvious and influential "paper market" offender.
When the futures exchanges like the CME hike margin rates unexpectedly, it's usually under the pretense of protecting the "integrity of the exchange" by increasing the collateral (money) required to hold a position, both for the long (future buyer) and the short (future seller). When they unexpectedly raise margin requirements two days after silver has already declined by 22%, however, who do you think that margin increase hurts the most? The long buyer, or the short seller?
By raising the margin requirement at the very moment the long contracts have already received an initial margin call (because the price of silver has dropped), they end up doubling the longs' pain -- essentially forcing them to sell their contracts. This in turn creates even more downward price pressure, and ends up exacerbating the very risks the margin hikes were allegedly designed to address.
When reviewing the performance of silver this year, it's important to acknowledge that nothing fundamentally changed in the physical silver market during the sell-offs in May or mid-September. In both instances, the sell-offs were intensified by unexpected margin rate hikes on the heels of an initial price decline.
It should also come as no surprise to readers that the "shorts" took advantage of the September sell-off by significantly reducing their silver short positions. Should physical silver be priced off these futures contracts? Absolutely not. That they have any relationship at all is somewhat laughable at this point.
But futures contracts continue to heavily influence spot prices all the same, and as long as the "longs" settle futures contracts in cash, which they almost always do, the futures market-induced whipsawing will likely continue.
It also serves to note that the class-action lawsuits launched against two major banks for Silver manipulation remain unresolved today, as does the ongoing CFTC investigation into silver manipulation, which has yet to bear any discernible results.
Meanwhile, despite the needless volatility triggered by the paper market, the physical market for silver has never been stronger. If the September sell-off proved anything, it's the simple fact that PHYSICAL buyers of silver are not frightened by volatility.
They view dips as buying opportunities, and they buy in size. During the month of September, the US Mint reported the second highest sales of physical silver coins in its history, with the majority of sales made in the last two weeks of the month.
Reports from India in early October indicated that physical silver demand had created short-term supply issues for physical delivery due to problems with airline capacity.
In China, which reportedly imported 264.69 tons (7.7 million oz) of silver in September alone, the volume of silver forward contracts on the Shanghai Gold Exchange was more than six times higher than the same period in 2010.
It was clear to anyone following the silver market that the physical demand for the metal actually increased during the paper price decline. And why shouldn't it? Have you been following Europe lately? Do the politicians and bureaucrats there give you confidence?
Gold and silver are the most rational financial assets to own in this type of environment because they are no one's liability. They are perfectly designed to protect us during these periods of extreme financial turmoil. And wouldn't you know it, despite the volatility, gold and silver have continued to do their job in 2011.
As we write this, in Canadian dollars, gold is up 23.4% on the year and silver's up 6.8%. Meanwhile, the S&P/TSX is down -12.3%, the S&P 500 is down -5.1% and the DJIA is up a mere +0.26%.
So here's the question: We think we understand the value and great potential in silver today, and we know that the buyers who bought in late September most definitely understand it... but do silver mining companies appreciate how exciting the prospects for silver are?
Do the companies that actually mine the metal out of the ground understand the demand fundamentals driving the price of their underlying product? Perhaps even more importantly, do the miners understand the significant influence they could potentially have on that demand equation if they embraced their product as a currency?
As we approach the end of 2011, the Silver spot price has admittedly endured a tougher road than we would have expected. And let's be honest -- what investment firm on Earth has pounded the table on silver harder than we have?
After the orchestrated silver sell-off in May 2011, silver promptly rose back to US$40/oz where it consolidated nicely, only to drop back below US$30 within a two-week span in late September.
The September sell-off was partly due to the market's disappointment over Bernanke's Operation Twist, which sounded interesting but didn't involve any real money printing. Like the May sell-off before it, however, it was also exacerbated by a seemingly needless 21% margin rate hike by the CME on Sept. 23, followed by a 20% margin hike by the Shanghai Gold Exchange -- the CME's counterpart in China, three days later.
The paper markets still dictate the spot market for physical gold and silver. When we talk about the "paper market," we're referring to any paper contract that claims to have an underlying link to the price of gold or silver, and we're referring to contracts that are almost always levered.
It's highly questionable today whether the paper market has any true link to the physical market for gold and silver, and the futures market is the most obvious and influential "paper market" offender.
When the futures exchanges like the CME hike margin rates unexpectedly, it's usually under the pretense of protecting the "integrity of the exchange" by increasing the collateral (money) required to hold a position, both for the long (future buyer) and the short (future seller). When they unexpectedly raise margin requirements two days after silver has already declined by 22%, however, who do you think that margin increase hurts the most? The long buyer, or the short seller?
By raising the margin requirement at the very moment the long contracts have already received an initial margin call (because the price of silver has dropped), they end up doubling the longs' pain -- essentially forcing them to sell their contracts. This in turn creates even more downward price pressure, and ends up exacerbating the very risks the margin hikes were allegedly designed to address.
When reviewing the performance of silver this year, it's important to acknowledge that nothing fundamentally changed in the physical silver market during the sell-offs in May or mid-September. In both instances, the sell-offs were intensified by unexpected margin rate hikes on the heels of an initial price decline.
It should also come as no surprise to readers that the "shorts" took advantage of the September sell-off by significantly reducing their silver short positions. Should physical silver be priced off these futures contracts? Absolutely not. That they have any relationship at all is somewhat laughable at this point.
But futures contracts continue to heavily influence spot prices all the same, and as long as the "longs" settle futures contracts in cash, which they almost always do, the futures market-induced whipsawing will likely continue.
It also serves to note that the class-action lawsuits launched against two major banks for Silver manipulation remain unresolved today, as does the ongoing CFTC investigation into silver manipulation, which has yet to bear any discernible results.
Meanwhile, despite the needless volatility triggered by the paper market, the physical market for silver has never been stronger. If the September sell-off proved anything, it's the simple fact that PHYSICAL buyers of silver are not frightened by volatility.
They view dips as buying opportunities, and they buy in size. During the month of September, the US Mint reported the second highest sales of physical silver coins in its history, with the majority of sales made in the last two weeks of the month.
Reports from India in early October indicated that physical silver demand had created short-term supply issues for physical delivery due to problems with airline capacity.
In China, which reportedly imported 264.69 tons (7.7 million oz) of silver in September alone, the volume of silver forward contracts on the Shanghai Gold Exchange was more than six times higher than the same period in 2010.
It was clear to anyone following the silver market that the physical demand for the metal actually increased during the paper price decline. And why shouldn't it? Have you been following Europe lately? Do the politicians and bureaucrats there give you confidence?
Gold and silver are the most rational financial assets to own in this type of environment because they are no one's liability. They are perfectly designed to protect us during these periods of extreme financial turmoil. And wouldn't you know it, despite the volatility, gold and silver have continued to do their job in 2011.
As we write this, in Canadian dollars, gold is up 23.4% on the year and silver's up 6.8%. Meanwhile, the S&P/TSX is down -12.3%, the S&P 500 is down -5.1% and the DJIA is up a mere +0.26%.
So here's the question: We think we understand the value and great potential in silver today, and we know that the buyers who bought in late September most definitely understand it... but do silver mining companies appreciate how exciting the prospects for silver are?
Do the companies that actually mine the metal out of the ground understand the demand fundamentals driving the price of their underlying product? Perhaps even more importantly, do the miners understand the significant influence they could potentially have on that demand equation if they embraced their product as a currency?
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