Monday, December 29, 2008
Dec. 29 (Bloomberg) -- The U.S. Treasury said it will purchase a $5 billion stake in GMAC LLC, the financing arm of General Motors Corp.
“The company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles,” GMAC said in statement.
GMAC had limited loans to buyers with the best credit ratings, cutting into GM’s sales.
The credit from the Treasury is under its Troubled Asset Relief Program and comes after the Federal Reserve last week approved GMAC’s application to become a bank holding company.
Treasury provides financial support to 43 banks
WASHINGTON – The Treasury Department said Monday that it has provided $1.9 billion to 43 banks as part of the government's $700 billion financial rescue program.
The department previously announced that it was providing the money but did not reveal the recipients' names until late Monday.
Some of the funds were granted to 20 privately held banks. A total of 34 private banks have now received funds from the financial rescue program.
So far, Treasury has invested more than $162 billion in 207 banks. The department set aside $250 billion from the bailout fund to be used for direct investments in banks.
The investments are intended to bolster banks' balance sheets and spur them to step up lending to counter the worst financial crisis to hit the country in 70 years. But critics contend that many banks are not using the money for that purpose.
There's No Pain-Free Cure for Recession
By PETER SCHIFF
As recession fears cause the nation to embrace greater state control of the economy and unimaginable federal deficits, one searches in vain for debate worthy of the moment. Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug.
...It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.
I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice.
Gold and Silver in 2009
By: James Turk
Gold will climb into 4-digits in the first quarter and this time will remain in 4-digits for the rest of the year. The potential high is $1800 per ounce ($57.87 per goldgram). I expect the low to be $850, which will be reached early in the first quarter. In short, 2009 is shaping up to be the key "break-out year" for gold. It will become a "break-out year" because the average investor will start becoming aware of gold and begin buying. Despite its remarkable performance throughout this decade, few people own physical gold. That will begin to change in 2009 as the financial disruptions will worsen and people seek a safe haven for their money.
Silver is dirt cheap. It’s only a matter of time before it climbs above $30, but if you choose to buy silver, be prepared for the volatility, which is reflected in the gold/silver ratio. I think the ratio will not break above over-head resistance in the low 80s. The downside potential for the ratio is 45 or so, which is the bottom of its multi-year trading range. If I am right that gold reaches $1800 sometime during the course of 2009, and if the low in the gold/silver ratio is 45 at that same moment in time, then mathematically, silver would be $40. If the ratio only moves to 60, then silver will be $30. In any case, I expect the gold/silver ratio to fall in 2009. Thus, regardless of the prices they eventually achieve, I expect that silver will outperform gold in 2009.
Sunday, December 28, 2008
WASHINGTON - LAWMAKERS are turning up the heat on banks that have received money from the Treasury Department's $700 billion (S$1 trillion) rescue fund after the Associated Press reported that they wouldn't say how they are using the money.
Sens Dianne Feinstein and Olympia Snowe said on Tuesday that they will propose legislation next month to force companies that receive money from the fund to report how they have spent it.
The legislation would also prohibit them from spending the taxpayer dollars on lobbying or political contributions. It would also apply to some recipients of the Federal Reserve's emergency lending programs.
The legislation was introduced earlier this year, but the Senate did not take it up. The sponsors have long said they plan to pursue it when the 111th Congress convenes Jan 6.
'At present, we don't know whether these companies are using these funds to fly on private jets, attend lavish conferences or lobby Congress,' Ms Feinstein, a Democrat, said in a statement.
Gold prices on revenge and retaliatory mood
MUMBAI : Revenge seems to be the key word for gold prices to rise. While India is seen taking revenge on Pakistan on its alleged role in Mumbai attacks, the Palestinians are keen on taking revenge on Israel after its attack post cease-fire in Gaza Strip.
And these political tensions may just help gold prices as investors are relying more and more on Gold and the commodity has proved to be the sole bread earner and safe investment in the year 2008. Even the ever-dependable crude could not help the investors as it is faring badly even now.
All other investment vehicles have given negative returns while gold is, in all probability, expected to reach $930 per oz by mid January 2009. In India, the political tension and an impending war situation has only made rupee weaker which will impact the gold prices in the largest gold consuming region in the world.
In addition, the bad omen for weddings will be over in less than 15 days and gold buying will begin soon not only on account of marriages but also due to festive occasions which will put the demand of gold on a high pedestal – raking up the prices.
So as the mood of retaliatory attacks and revenge scenarios emerge, the gold investors will laugh all the way to the bank – welcoming the New Year with much more cheers.
Will COMEX Default on Gold and Silver?
The Commodities Futures Trading Commission is charged with the responsibility to monitor and regulate American futures markets. In spite of this, the futures markets have morphed from a legitimate place to hedge the risk of commodities, into a worldwide casino, which has a gaming commission that claims all of games of chance are really “investing”. This is nonsense. The exchanges are mostly used as gambling halls, with banks as casino operators, and speculators serving in the role of casino guests. All types of bets, from taking odds on interest rates to taking odds on the volatility of the stock markets (with no underlying security except the VIX!) are allowed, and are available to anyone who enjoys games of chance. If the CFTC ever bothered to enforce its own enabling act, and associated regulations, most of these games of chance would be quickly closed. For example, CFTC regulations require 90% of all deliverable commodity contracts (including gold and silver) to be covered by stockpiles of the real commodity, and/or real forward contracts from real producers (like miners). In practice, however, CFTC has never done a spot audit of even one vault. We really have no idea whether or not short sellers really have the gold or silver that they claim to have. We can assume that they probably don’t, given that the number of futures contracts issued has often exceeded the entire known supply of silver, for example, in the entire world.
Indeed, in spite of rampant speculation as to their identity, in truth, we don’t even know who the short sellers are. Other countries, like Japan, have full disclosure of identities and positioning, in open and transparent futures markets, but this is not true of the much larger futures markets based in America. American futures markets are mostly opaque, because the CFTC keeps the information secret. Lack of transparency always is a recipe for fraud and corruption. The likelihood of widespread violations, occurring at exchanges regulated by CFTC, is very high. Logical people, therefore, can make some reasonable assumptions. It is quite likely that the sellers on COMEX do not have 90% of their silver contracts, for example, backed by stockpiles of the metal.
Yet, adherence to Federal regulation is an implicit provision in the terms and conditions of every futures contract. If COMEX and/or NYSE-Liffe short sellers are entering into naked short contracts, they are violating market rules, falsely presenting their contracts to the public, and doing all this with a premeditated intent to defraud buyers. Knowingly making false assertions and promises is fraud in the inducement. Violation of the market rules is also “fraud upon the market”, and a federal and state felony level crime that can result in a long jail sentence. The vast majority of short positions in gold and silver appear to be held by only 2 – 3 American banks, so, it would be extraordinarily easy to pinpoint the perpetrators. Potentially, they could be prosecuted for market manipulation, common law fraud, state and federal RICO actions, as well as other counts.
In other words, a large scale default on COMEX or NYSE-Liffe would not only trigger the paying of money damages, but would also involve criminal liability. Even if a few individuals within the federal government are complicit, as has been alleged, and the U.S. Justice Department refused to prosecute, there are enough politically ambitious state prosecutors to take up the baton. Futures market short sellers would pay a heavy price if there were ever a big default. Because of this, they will spend whatever money is needed to make sure it never happens.
US Consumption Worth More Than All the Gold in the World
Who can forget the James Bond film "Goldfinger" where the arch villain attempts to render all the gold held at Fort Know radioactive in order to make gold skyrocket in price as he has a large gold position? Great film.
I was thinking about that today as I read another "Mogambo Guru" article over at "The Daily Reckoning". While the writer Richard Daughty is always hilarious and informative, he had this little tidbit today that was pretty good:
I was slurring my words pretty badly, and I forget where I saw it because it mysteriously disappeared in a frenzy of cutting and pasting back at the office, but I'm telling the bartender that some bozo was saying that if the Treasury's gold (or the Fed's gold, depending on who you figure has it) was revalued up from its current and historical book value of $42 an ounce, then the financial picture of the United States doesn't look so bad! Hahahaha!
I can tell by the look on his face that he is not a big fan of economic humor, and must be pretty much "all business" by the way he keeps repeating, "That'll be $6.50 for the drink, pal."
Cleverly, I reply, "I don't know if you are aware of it or not, my dear fellow, but the total amount of gold held by the government/Fed is only about 261 million ounces! That's all! Less than one ounce per person in the USA!"
He looked at me again and repeated, "That'll be $6.50, pal."
Undaunted, I went on, "And at $800 an ounce, that 261 million ounces comes to a value of $209 billion! Hahaha! A lousy $209 billion! Hahahaha!"
At this, I stand up and address the other patrons of the bar, saying, "And already something like $8.5 trillion over the next years in new spending/guarantees have been proposed! Not to mention the original $700 billion in TARP scams and schemes already spent, and more hundreds of billions in bailouts of every kind every day!"
Really warming up to it, I bellow, "Hell, the projected federal budget deficit for next year alone is upwards of a trillion dollars, almost 5 times as much as the total value of all the gold we have as a nation! And this is just the budget deficit! Hahaha! We're freaking doomed!"
So all the Gold held by the US is fair valued at a whopping $209 Billion. That is not even an AIG bailout, let alone a 1 Trillion dollar stimulus plan! Figure in all the other debt the US has and you can see there is not much backing our currency.
So how does America do it? How is it that we can spend all we want, and then spend even more while we have nothing intrinsic or put back anything of value into the world? The answer is one word:
The US has become the world's mega consumer. Japan, China, and many others rely entirely on US consumption to keep their economies going. If US consumption falls, those countries face severe issues. And thus this is how we have arrived at the obscene reality of the current day: The US spends all the money they have on consumption, then other foreign buyers buy a bunch of our debt to fuel even more consumption. The US makes out because we can do whatever we want, and the foreign countries pretend the money they lend us that we use for consumption is really flowing back into their economies. Sounds wonderful.
I have been perplexed at how long this has gone on and why it has not broken down by now. There seems to be no easy answer. I think things will carry on unless acted upon by an "outside" event. By this I mean a major world war or a conflict that is costly in terms of hard assets.
Consider that the US has no real oil reserves, no gold or silver, little gas refining ability, and no manufacturing base. If a major conflict broke out, how could the US pay if suppliers demanded hard assets? If major Asian countries were more worried about being invaded and less concerned with growing a middle class based on US consumption, might they stop playing the "cash recycle" game with the US?
The US does indeed have massive military holdings as well as nuclear materials. I guess that is something. While I cannot envision a scenario like this happening, it is an object lesson just to consider. US consumption is worth more right now than real money or gold. For as long as the semblance of the status quo can be maintained this will be enough. If things were to change, it would change overnight. Food for thought.
Bob Chapman, The International Forecaster
This continued credit injection is to insure a sufficient system. This is calculated to steady the bubble and perpetuate the massive flow of dollar finance out to the global financial system, which in the final analysis will not solve the problem. It insures permanent monetary disorder.
This is going to be very bad for the dollar in the long run. Some even think the dollar will win by default versus other currencies, but in fact they’ll all lose versus gold in varying degrees. A good point to remember is that this time the Chinese are not going to be around to bail out the $2.5 billion daily needs of the US Treasury.
All Americans are going to have to get used to a whole new way of life. They will be walking to the mall to visit the few remaining shops that are still open there. The public is completely unprepared for the difficult life they face. The brainwashed, brain-dead, propagandized in our society are going to be forced to face reality. Comfort and convenience will be a thing of the past. It will be a struggle for food and to pay the mortgage and car payments for those lucky enough to have jobs.
Monday, December 22, 2008
This will be my last post for the week. Despite my suggestions, Christmas was not canceled this year. The markets are trading very thin at this time of the year, and trying to determine direction most likely fruitless. LOL, as if the past 9 months have offered any opportunity to determine direction. Persistence in our cause will pay-off. Step away from the markets now, and enjoy the Holiday Season with me. Be safe, be honest, and be thankful. See you all back here next week.
Money market funds reel as yields near zero
Money market funds, an increasingly popular place to park cash, will need to raise fees or close to new money to remain profitable as yields hover at near-zero, according to industry managers.
The cost of running money market funds is greater than the fees charged. Usually, the difference is not great, and the funds are able to pick up profit on excess yield.
However, the gap between costs and fees has widened, and yields have plummeted. The average yield on a Treasury retail fund was 0.34 per cent at the end of November, compared with 2.9 per cent last December, according to iMoneyNet, an industry tracker. About one in 10 money funds yields nothing.
Mr McDonald said: “Our Treasury fund yield was net 50 basis points after investor fees, and our expense is 47 basis points. If assets remain unchanged and we continue to roll over securities, our fund will run out of yield in February.
Where'd the bailout money go? Shhhh, it's a secret
WASHINGTON – It's something any bank would demand to know before handing out a loan: Where's the money going?
But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the money or they simply refuse to discuss it.
The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what's the plan for the rest?
None of the banks provided specific answers.
Some banks said they simply didn't know where the money was going.
There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But there is no process in place to make sure that's happening and there are no consequences for banks who don't comply.
"It is entirely appropriate for the American people to know how their taxpayer dollars are being spent in private industry," said Elizabeth Warren, the top congressional watchdog overseeing the financial bailout.
But, at least for now, there's no way for taxpayers to find that out.
AP study finds $1.6B went to bailed-out bank execs
Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.
The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.
John Embry: U.S. calls tune as gold, silver plunge
Sprott Asset Management's John Embry writes in detail about the gold price suppression scheme in his latest essay for Investor's Digest of Canada. It's headlined "U.S. Calls the Tune as Gold, Silver Plunge" and you can find it in PDF format at the Sprott Internet site here:
Sunday, December 21, 2008
Right now, the Treasury, the Federal Reserve, and the banking system seem to be gearing up for an event the likes of which has never been seen. I believe the crisis that will unfold over the next few years will add up to the biggest economic event in history. The scale of what is happening will dwarf all other economic events combined. The Tulip mania of 1637, John Law's "Mississippi Scheme" of 1720, and the dot-com / tech bubble of 1999 will pale by comparison. Even the hyperinflation in Weimar Germany in 1923 and the Great Depression will seem like a walk in the park compared to what is coming.
GOLDMAN SACHS MAKES MASSIVE COVERING OF GOLD SHORTS - GOES NET LONG!
In the December 18 session on the TOCOM Goldman Sachs COVERED an absolutely gob-smacking 1,307 gold short contracts which reduces their short position to just 495 contracts and leaves their long position unchanged at 1,337 contracts and makes them NET LONG – REPEAT, NET LONG 842 contracts. This is an absolutely stunning development! This is the largest net long position they have held ever since I have been tracking the TOCOM data which is almost 3 years. Considering Goldman’s role in the Cartel and links to the Treasury this is of earth shattering significance. It should also be noted that for ANY trader to be buying 1.3 tonnes of gold in a single day it deserves attention, when it is Goldman Sachs it has special significance.
Fed Fights to Weaken Dollar
by Axel Merk
Faced with the threat of deflation, the Federal Reserve (Fed) may be trying to drive the dollar lower to spur inflation. As policy makers don't want home prices to deteriorate further, an alternative is to inflate the prices of all other goods and services: as a result, the relative prices of homes would be less expensive. Weakening the dollar is an effective policy tool to drive up inflation as the cost of import goes up. Just be careful: the Fed may be getting more than it is bargaining for. Fed Chairman Bernanke believes that a weaker dollar will only drive up inflation modestly; in our humble opinion, we believe he may be mistaken. Foreigners have a limit on how much margin pressure they can absorb before they have to pass on the higher cost of doing business. We saw this phenomenon in the spring time, when higher commodity prices forced Asian exporters to drive up prices; import prices into the U.S. were up over 20% year over year (and still up substantially after factoring out what was soaring oil prices at the time). No country has ever depreciated itself into prosperity and the U.S. is unlikely to be the first.
Battle of the Flations
by Bud Conrad
One of the most hotly debated topics among financial talking heads these days is, "Deflation or inflation, what is it going to be?"
There is no question that we are currently experiencing asset price deflation and economic slowing. But we, the editors of The Casey Report, see this as a transitional phase. In our analysis, the truly extraordinary and historic levels of government spending and bailouts being deployed to keep the economy afloat are certain to lead to inflation in the not-too-distant future.
While our long-term view remains solidly in the inflation camp, over the past four months, the U.S.'s financial problems have caused deflation in many important asset classes. Put another way, a reduction in asset prices amounting to about $14 trillion (in housing, equities, etc.) is bigger than the government's countervailing actions of around $3 trillion -- the total, so far, arrived at by combining the measures taken by the Fed with the federal government bailouts.
But there are important differences between a sharp collapse in asset prices and the potentially leveraged stimulus packages.
The Fed's actions, if taken in normal times, would be multiplied throughout the banking system as banks used the new money to increase their lending and, in so doing, leveraged the funds throughout the entire economy. This time around, however, while the Fed has been extremely accommodating to the banks, even going so far as to make direct loans to them, the effect is moderated. That's because of tighter lending standards, the need to replenish capital, and the demise of many complex structures, which were previously available for securitizing and selling loans on to others.
As a result, the banking system as a whole is not responding to the stimulus. It can be thought of as pushing on a string. Simply, as large as the stimulus has been to date, it has not yet been enough to offset the effects of the economic collapse. The resulting deflationary pressure increases concern over a downward spiral in the economy.
Another way to view this is that consumers and businesses alike are now anticipating deflation, which makes saving and survival the primary goal (in an inflation, spending becomes the primary goal, unloading the money before it can lose value). Of course, a cutback in spending and demand drives down the price of things, at least temporarily.
But the longer-term expectation is that Bernanke's assertion - an assertion now backed up by action - that the government can and will print new money to any extent needed is the more important force.
The International Forecaster
What is a self-respecting, megalomaniacal, Illuminist miscreant-reprobate-sociopath to do under such horrifying circumstances? We'll tell you what they did.
The first problem was that Bernanke was flooding the system with money and credit to keep it afloat as the credit-crunch went wild, with M3 at 14% to 16%. This was highly inflationary. How can you lower borrowing rates to increase spreads when inflation is out of control? Answer: you can't, if you want to retain some semblance of credibility. So the Illuminati took advantage of the US sheople's ignorance concerning economics. They know that people look at prices to gage inflation, when it is really the money supply that controls the level of inflation. Prices are the symptom, not the cause. So they ran up all commodities, even gold and silver, for a time so that they could bring about a dramatic drop in prices later to give the perception that inflation was under control and that deflation might be setting in. This is how they justified the near-zero interest rates you now see, which can yield a huge spread of about 5%, which is more than five times what was available before all the trouble started.
In the meanwhile, the Fed arranged to accelerate the payment of interest on hoarded bank capital on reserve with the Fed. This bank capital will now be deployed, but it will be used for elitist speculation and insider trading, not for the opening of credit markets to consumers. The idea is to keep the salaries, bonuses, dividends and spreads going in order to line the pockets of elitists, not to save the middle class. They are going to throw your money, via taxpayer-funded bailouts, down a rat-hole, the exit for which comes out into their back pockets. They will become fabulously wealthy, while you are hyper-inflated into oblivion, as your dollars are thrown at insolvent elitist companies that are being artificially animated like zombies. Taxpayer-owned equities, received in exchange for bailout money, are absolutely worthless. They will re-inflate after they have destroyed the auto industry and as many non-Illuminist companies as they can to eliminate competition. The loan money will not be available for these unfortunate souls and entities. Ford may absorb GM and Chrysler before it also succumbs, and then it will be nationalized as our Communist Comrade Obama uses members of the former Clinton Administration to destroy what is left of our economy. Does he really expect change from these people? Of course not. He did not pick them. They were chosen for him. http://news.goldseek.com/InternationalForecaster/1229888346.php
Rock, Paper, Scissors
RUNNING into YEAR-END 2008 with a hatful of fears, losses, hope and questions?
Here's another puzzler to ponder as the $3 trillion of tax-funded bailouts now promised worldwide slowly roasts every bond-holder's goose over Christmas...
As a proportion of global investable assets, Gold hasn't been this strongly-weighted for the last 15 years.
But seeing how this financial crisis is the ugliest since the Great Depression, World War I or perhaps even earlier (depending on which political hack, wonk or meddler you speak to), it could still double again – if not rise more than ten-fold.
Either that, or the value of paper assets – meaning stocks and bonds – could tumble in half. If not sink by more than nine-tenths.
...comparing all the gold-in-the-world against stocks and bonds shows a far less than "extreme reading" for investor stress. So far, at least.
Back in 1980, for instance – when the Iranian crisis and war in Afghanistan last sent gold to a nominal peak at $850 an ounce – "the $1.6 trillion invested in gold exceeded the market value of $1.4 trillion in US stocks," according to Peter Bernstein in his classic tome, The Power of Gold.
US equities today stand closer to $13 trillion. Every ounce of gold ever mined is worth barely one-third.
Put another way (and yes, the numbers are rough once again), "We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets," wrote Tocqueville's John Hathaway almost three years ago.
"In 1934 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%."
In short, the mass people choosing to Buy Gold today remains tiny compared to the value which the world still puts on paper. And it's only when paper collapses in value – an event you might expect during the worst post-WWII crisis – that gold is likely to hit its true peak for this investment cycle. http://news.goldseek.com/BullionVault/1229710394.php
The Idiocy of Bernanke's Bubbles and CNBS
Treasury seems to think they can issue essentially limitless debt to bail out banks and others, having committed nearly $7 trillion thus far. Most of that has been issued through various short-term paper which has a near-zero (or actually zero!) interest rate - that is, up until now that debt issue has been essentially free!
What happens when this bubble bursts?
You think it won't? Like hell it won't. And when it does - that is, when Mr. Market calls the bet and forces Bernanke to actually make good by starting to unload all these "accumulated" Treasuries into his gaping maw, we will see "shock and awe" of another sort.
See, if the selling starts rates go up. To stop that Ben has to take up the supply. This causes him to print more money (expand his balance sheet) which means that the full faith and credit he relies on is further damaged. That in turn causes more people to get the idea that they better sell now which in turn causes him to buy more which...
Remember the waterfall in September and October in stocks?
The same thing can happen in the Treasury market, and if it does it will force a political decision to be taken - risk the destruction of the dollar and our government or remove - by immediate statutory change (and force if that is resisted) The Fed's authority.
The argument keeps being made that "we had to do this" to save the system. But what's not being talked about is what the real problem was, and who we're trying to save.
The political class keeps trying to tell us that "we have to do this for mainstreet" and "we have to help homeowners."
Let's look at a few facts, shall we?
First, total mortgage debt outstanding. Its about $14 trillion dollars.
With the $7 trillion dollars we have committed we could have literally given every homeowner with a mortgage a fifty percent reduction in the principal outstanding.
This would have instantaneously stopped all of the foreclosures by putting all (essentially) homes into positive equity - overnight!
So why wasn't this done?
Because the goal was never saving homeowners or Main Street.
In point of fact the problem that the government is "trying to solve" is instead the unregulated bets that were made in the OTC CDS space which were backed by exactly nothing; there was no capital behind any of these bets!
There is no fix for this problem; your leverage is effectively infinite if you have no capital behind your positions. You are limited only by your testosterone level and there's been far too much of that on Wall Street over the last decade.
This was not an accident; in fact Henry Paulson himself lobbied for the removal of the previous leverage limits as I have noted when he was Chairman of Goldman Sachs. Between that and the complete refusal to regulate anything or anyone by the SEC, OTS, OCC, The Fed or anyone else we have built what amounts to a pyramid scheme based on nothing other than debt.
What Bernanke and Paulson are in fact trying to do - and what they have been trying to do since this crisis began - is paper over the bad bets that companies like Citibank, Lehman, Bear Stearns and AIG made with zero (or nearly so) capital behind them.
That is why we have committed $7 trillion dollars, it is why Paulson keeps changing how the "TARP" is going to work and what it is going to do, it is why AIG has gotten bolus of money after bolus as its bets have deteriorated further and in fact it is why The Fed took the arguably-illegal step of buying the assets against which AIG wrote the bets (so it could null them out; you own both sides of a bet there is no bet at all - but the loss on the underlying is now yours!)
The problem with this strategy is that it hasn't changed a damn thing, because with the exception of Lehman (which was allowed to blow up) these contracts were never extinguished; a loss is a loss and when you own both sides you're guaranteed to be the sucker who eats the grenade. All we have done is change where the leverage lies; we have taken the 30 or 50:1 leverage from the investment and commercial banks and moved it onto the balance sheet of The Federal Reserve!
This explains why The Fed is "resisting" Bloomberg's FOIA and has forced Bloomberg to file a lawsuit; laying bare the "assets" being held would allow independent evaluation of their value. This is extraordinarily dangerous to The Fed because if "we the people" (or worse, foreigners who have loaned us those trillions of dollars) were to get a look inside these "assets" and found that they were in fact so-called "AAA" mortgage bundles that have forty percent default rates embedded in them (as was found in one particular WaMu securitization I and Mish Shedlock were writing about earlier in the year) fair-minded people might conclude that The Federal Reserve is in fact broke and lying about their own solvency!
Friday, December 19, 2008
Whatever It Takes
By James Turk
The Fed would have us believe that low interest rates and easy money will solve today's monetary and economic problems. It was of course low interest rates and easy money that put the US - and much of the world - into this monetary and economic mess in the first place. Is it reasonable to expect that the cause of today's problems is also the cure? No, of course not, and the Fed knows that too. But there is some method to their madness.
They hope - and it is nothing more than that - that low interest rates and easy money will spur consumer confidence, causing banks to lend and people to go out and spend. It won't work though, as can be easily proven by picking up a good textbook or two. Monetary history makes clear the recurring boom/bust cycle.
Banks lend too much, creating the boom. The bust then follows after it becomes clear that the boom was built upon easy credit that fostered bad decisions.
We have had the boom. We are now in the bust. We have moved from a period of over-spending and over-borrowing to one in which the bad loans and bad decisions from the boom years come home to roost, creating the bust.
The Federal Reserve wants us to believe that the sole problem reverberating throughout the world is simply a lack of liquidity, but it is nothing of the sort. It is in fact one of solvency. Most banks and many consumers and companies are over-extended, and their precarious financial position cannot be put right with newly created dollars.
What's needed today is the same medicine that has over time inevitably cured every other bust. It is capital and savings, and unfortunately, they are in short supply in today's America. But the Federal Reserve will not be deterred from pursuing the reckless path it is on. They seem to think that they can avoid the bust, and further, that the economy can emerge unscathed from years of imprudent and reckless credit extension by the banks.
History says the Fed is mistaken, but history also tells us something else. The consequences of the Fed's actions will debase the dollar, perhaps irreparably so.
Since last month's peak in the Dollar Index, gold has climbed 6.3%, while silver did even better. It has climbed 12.6%. These precious metals are clearly the place to be, given the path of monetary debasement being taken by the Fed.
Fed’s new strategy to cut cost of borrowing
With US interest rates now virtually zero, the Federal Reserve is deploying a range of new and unorthodox tools. But its objectives remain the same: to limit the severity of the recession, and over time achieve low unemployment and price stability.
The Fed can still stimulate the economy by reducing the actual borrowing costs facing households and companies. These remain high even though the so-called Federal funds rate set by the Fed – the rate banks charge to lend each other surplus reserves overnight – is now fixed in a range from zero to 0.25 per cent.
The Fed wants to reduce borrowing costs in real (inflation-adjusted) terms. So it also has to ensure that people do not start to expect deflation, or falling prices.
There are three basic elements that make up real borrowing costs. The risk-free rate represented by the yield on a government bond of similar duration, the risk premiums or “spreads” charged to households and companies and the expected inflation rate.
The Fed’s new strategy targets all three. But it is primarily focused on risk spreads, because spreads are abnormally high, whereas risk free rates are quite low, and the Fed still does not believe there is a big deflation risk.
In normal times this would be dangerous, because it would risk fuelling inflation. However, increasing the money supply is helpful today, because it guards against the possibility of deflation – falling prices – in the future.
Will it work? Theory suggests that if the Fed is willing to print enough money to buy enough assets it can avoid sustained deflation – though it might have to go to extremes to do so.
The harder question is to what extent the Fed’s unorthodox policies will succeed in restoring growth. Some options – such as buying mortgage-backed securities to push down home loan rates – look promising.
However, the Fed’s ability to expand its credit operations is limited by its need for Treasury to provide capital to take on the credit risk associated with non-government (or quasi-government) lending, as well as practical and human constraints.
The Fed does not know what exact combination of factors explain today’s high risk spreads. If factors other than liquidity risk explain much of the risk spreads, then Fed operations may not reduce spreads as much as it hopes – unless it becomes the market by buying assets.
Japan central bank cuts key rate to 0.1 percent
TOKYO (AP) -- Japan's central bank cut its key interest rate to 0.1 percent on Friday, joining the U.S. Federal Reserve in lowering borrowing rates to nearly zero amid an ever-worsening outlook for the global economy.
The Bank of Japan also introduced new steps to thaw a growing credit crunch for companies.
The bank said it plans to start buying commercial paper -- the short-term debt firms use to pay everyday expenses -- in an effort to funnel cash directly to firms and will increase its purchases of government bonds to 1.4 trillion yen ($15.7 billion) per month from 1.2 trillion yen ($13.4 billion).
Bank of Japan Gov. Shirakawa said recent foreign exchange fluctuations factored into Friday's rate cut.
"A stronger yen affects the economy in multiple ways," he said. "But our decision was not based solely on the yen. Rather, we focused on the overall economic picture."
The Japanese currency's dramatic surge this week has triggered strong language on the political front, with government officials dropping hints at possible intervention to limit the yen's climb and protect Japanese exporters.
Yen Recovers After Dip Against Dollar
TOKYO -- The yen dipped against the dollar in Asia Friday after the Bank of Japan cut its key interest rates in response to the economic downturn, but continued concern over the U.S. economic outlook caused the Japanese currency to quickly recover.
After Japan's central bank cut its overnight call rate target to 0.1% from 0.3%, the U.S. currency briefly moved up to ¥89.63 from ¥89.29, but then soon headed lower again.
Following the U.S. Federal Reserve's move Tuesday to lower its own policy rate to effectively 0%, the BOJ's policy loosening means the interest rate gap between the U.S. and Japan has narrowed, something that should usually reduce upward pressure on the yen.
But traders said with the gap now nearly gone, the market has instead focused on the two countries' economic outlook, and that's prompting them to sell dollars.
"The dollar won't be able to rise far above ¥90 because many players are still interested in selling the dollar there," said Yuji Saito, head of FX Group at Societe Generale.
Tuesday, December 16, 2008
Helicopter Ben has parked his whirly bird. In an announced new campaign to fight financial calamity, Bumbling Ben has traded in his chopper for a B-52. Declaring the much maligned chopper as "not up to the task", Ben has decided to carpet bomb the continent with money thrown from the bowels of an aged Flying Fortress.
"The Benjamin's are gonna fly from the sky," he crowed as he buckled in for this continental air show of indeterminate duration.
The cut was more than many economists expected, and the statement that came with it left Wall Street Traders and Financial TV talking heads in a complete state of "shock and awe". Stock prices began reflating immediately as the Dollar[s] plummeted from the sky.
"Maybe there will be a Christmas after all," cried one teary eyed Wall Street trader clutching a fist full of Dollars.
"The Federal Reserve will employ all available weapons to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said in a statement. It added that it expected interest rates to remain "exceptionally" low for some time, a subtle commitment to the current policy that could help bring down longer-term interest rates.
President-elect Barack Obama used the Fed move as a rallying call for more fiscal stimulus, the idea of more government spending or tax cuts, which Fed officials support.
"We are running out of the traditional ammunition that's used in a recession, which is to lower interest rates," Mr. Obama said in a news conference. "They're getting to be about as low as they can go. And although the Fed is still going to have more tools available to it, it is critical that the other branches of government step up."
The approach carries several risks. It could eventually lead to the opposite of the current problem: higher inflation. It also exposes the independent central bank to political meddling and to losses on loans. Then there's the risk that it won't work.
"Sometimes your the hero, and sometimes you're the goat," Captain Bernanke said in prepared remarks. "I wash my hands of this dilemma once and for all," is all he had to say as he tossed the kitchen sink into the fray.
"God Bless America!"
Gold and Silver prices soared on the news that Captain Ben was going to carpet bomb the continent with Benjamins. Gold rose to meet resistance at 857-60. Silver exploded through 11 and found itself in the rarefied air around 11.40 before pausing to catch it's breath. Support now lies below at 835 for Gold and 11.11 for Silver.
A run on wheelbarrows was reported at several Home Depots across the continent as homeowners prepared to collect their stash. Santa Claus and his sleigh have nothing on Captain Ben and his B-52. Rejoice America! The price of EVERYTHING is about to go up.
The gold rush is on
By Adrian Douglas
The article that appeared in the Financial Times on Thursday and was dispatched by GATA was very significant:
What was especially significant was the article's necessity to supply disinformation:
"Traders have been hearing talk that the gold market could face a potential squeeze at the end of this year if market participants with futures position on New York's Comex exchange decide not to roll over their positions, because of concerns about counterparty risk and opt for physical delivery instead. But dealers dismissed the threat of a squeeze, pointing out that Comex gold stocks stand at 8.5 million ounces, well above the five-year average of almost 6 million ounces. ..."
The 8.5 million ounces cited here are the total Comex inventory. This includes gold that belongs to customers who are storing it on the exchange. The amount that is registered to dealers, and therefore available for delivery, is only 2.846 million ounces. The delivery notices that have been issued so far in December total 1.26 million ounces, which is 44 percent of the available deliverable gold. This assumes that the gold registered to dealers is totally unencumbered, which is not necessarily a good assumption in the fuzzy accounting world of Wall Street.
What is very telling is that the reason for investors taking delivery is given as "counterparty risk." They could have said that it was due to investors "wanting the safe haven of gold in times of financial crisis," etc. Stating unequivocally "counterparty risk" as the reason for high delivery demands is the first reference to the possibility of Comex going into default that has appeared in the mainstream press. It is also of note that it appeared in the Financial Times, which is traditionally anti-gold.
Without a doubt the hammering down of the paper gold price made many leveraged speculators head for the exits, as demonstrated by the 50 percent reduction in open interest. But the investors who remain are not leveraged, and unfortunately for the Gold Cartel they are taking delivery from the Comex. Talk of a squeeze due to "counterparty risk" will no doubt encourage more investors to take delivery.
Make no mistake about this. We are seeing the early signs of a gold rush like the world has never seen before. Investors do not take physical delivery of gold to sell it back for a 10 percent profit. The inflation-adjusted high of gold in 1980 is $2,500 today. But today we are in the midst of an unprecedented global financial crisis. Simultaneously every country is hell-bent on currency destruction as an antidote to too much debt creation.
The precious metals that are being taken off the market will not see the light of day again for a long time. The central banks have almost stopped selling gold and mine supply is dropping year after year.
How many times do you get warning of what will likely be the trade of the century? There is no such thing as a risk-free trade, but I think this is as good as it gets.
Investors should take physical delivery and not be leveraged. This way you will make sure you are around for payday and you will put more pressure on the shorts who have fraudulently sold gold and silver that they are unable to deliver.
Whether there is a massive squeeze on the Comex in December or February is irrelevant. The gold rush is on. When gold and silver become unavailable, prices will have to go up by multiples. The beaten-up mining sector will reach new highs. When the precious metals are not available in bullion form, the next best thing for investors will be companies that dig them out the ground.
Desperate to uncover Gold to meet mounting delivery requests NYMEX has just increased margin on silver and gold: gold at $5808, silver at $8640. This is unlikely to shake few apples from the tree as there are few left holding paper gold on the margin at the CRIMEX as "counter party risk" precedes an outright default in the paper Gold market.
Silver cracked the 10.50 barrier today and held the ground, so far. Follow through tomorrow is essential to any hopes the Silver Bulls may have about a squeeze of the shorts on the CRIMEX. Gold was higher today but met resistance at 835 as it regained 61% of it's October losses from 930 to 680. Gold's recent gains are looking a bit tenuous up here as Bearish Divergence in RSI signal a loss of upward momentum. Given that Gold is at resistance in price and at the top of it's present uptrend this should not appear to alarming, but should give pause to those Gold Bulls looking to add to positions at this time. A retest of the recent break at 815 my be necessary before Gold can move higher...or possibly a test of support at 805.
The Euro's recent launch higher can be attributed to both the ECB's suggestion that further interest rate cuts are not imminent in the Eurozone and the Fed's implied rate cut coming later Tuesday. The apparent collapse of the Dollar's powerful Bear Market Rally this fall has emboldened Gold Bulls, but one must maintain their guard against the evils still lurking at the CRIMEX. Gold has not reacted as strongly to this dump of the Dollar as one would expect. A move higher in the Dollar of 6 points would certainly have mauled the Gold price. It is a bit odd that Gold has not "reacted" higher than it has to such a big move "lower" in the Dollar.
Gold could certainly move higher from here, and do so quickly, based on fundamentals alone. However, given the suggestion that this past weeks moves in the currency and metals markets have been instigated by talk at the ECB and "anticipation" of further interest rate cuts by the Fed today, it would be wise to be on guard that the markets have priced in this information, and the Fed announcement later Tuesday "might" instigate a "sell the news" reaction in the markets, thus fulfilling the warnings of "possible" reactions in the charts posted today.
Gold's weekly bias has turned decidedly Bullish, and all dips in shorter time frames should be considered buy opportunities.
Federal Reserve sets stage for Weimar-style Hyperinflation
...once banks begin finally to lend again, perhaps in a year or so, that will flood the US economy with liquidity in the midst of a deflationary depression. At that point or perhaps well before, the dollar will collapse as foreign holders of US Treasury bonds and other assets run. That will not be pleasant as the result would be a sharp appreciation in the Euro and a crippling effect on exports in Germany and elsewhere should the nations of the EU and other non-dollar countries such as Russia, OPEC members and, above all, China not have arranged a new zone of stabilization apart from the dollar.
The world faces the greatest financial and economic challenges in history in coming months. The incoming Obama Administration faces a choice of literally nationalizing the credit system to insure a flow of credit to the real economy over the next 5 to 10 years, or face an economic Armageddon that will make the 1930's appear a mild recession by comparison.
Leaving aside what appears to have been blatant political manipulation by the present US Administration of key economic data prior to the November election in a vain attempt to downplay the scale of the economic crisis in progress, the figures are unprecedented. For the week ended December 6 initial jobless claims rose to the highest level since November 1982. More than four million workers remained on unemployment, also the most since 1982 and in November US companies cut jobs at the fastest rate in 34 years. Some 1,900,000 US jobs have vanished so far in 2008.
As a matter of relevance, 1982, for those with long memories, was the depth of what was then called the Volcker Recession. Paul Volcker, a Chase Manhattan appendage of the Rockefeller family, had been brought down from New York to apply his interest rate 'shock therapy' to the US economy in order as he put it, 'to squeeze inflation out of the economy.' He squeezed far more as the economy went into severe recession, and his high interest rate policy detonated what came to be called the Third World Debt Crisis. The same Paul Volcker has just been named by Barack Obama as chairman-designate of the newly formed President's Economic Recovery Advisory Board, hardly grounds for cheer.
The present economic collapse across the United States is driven by the collapse of the $3 trillion market for high-risk sub-prime and Alt-A home mortgages. Fed Chairman Bernanke is on record stating that the worst should be over by end of December. Nothing could be farther from the truth, as he well knows. The same Bernanke stated in October 2005 that there was 'no housing bubble to go bust.' So much for the predictive quality of that Princeton economist. The widely-used S&P Schiller-Case US National Home Price Index showed a 17% year-year drop in the third Quarter, trend rising. By some estimates it will take another five to seven years to see US home prices reach bottom. In 2009 as interest rate resets on some $1 trillion worth of Alt-A US home mortgages begin to kick in, the rate of home abandonments and foreclosures will explode. Little in any of the so-called mortgage amelioration programs offered to date reach the vast majority affected. That process in turn will accelerate as millions of Americans lose their jobs in the coming months.
John Williams of the widely-respected Shadow Government Statistics report, recently published a definition of Depression, a term that was deliberately dropped after World War II from the economic lexicon as an event not repeatable. Since then all downturns have been termed 'recessions.' Williams explained to me that some years ago he went to great lengths interviewing the respective US economic authorities at the Commerce Department's Bureau of Economic Analysis and at the National Bureau of Economic Research (NBER), as well as numerous private sector economists, to come up with a more precise definition of 'recession,' 'depression' and 'great depression.' His is pretty much the only attempt to give a more precise definition to these terms.
What he came up with was first the official NBER definition of recession: Two or more consecutive quarters of contracting real GDP, or measures of payroll employment and industrial production. A depression is a recession in which the peak-to-bottom growth contraction is greater than 10% of the GDP. A Great Depression is one in which the peak-to-bottom contraction, according to Williams, exceeds 25% of GDP.
In the period from August 1929 until he left office President Herbert Hoover oversaw a 43-month long contraction of the US economy of 33%. Barack Obama looks set to break that record, to preside over what historians could likely call the Very Great Depression of 2008-2014, unless he finds a new cast of financial advisers before Inauguration Day, January 20. Required are not recycled New York Fed presidents, Paul Volckers or Larry Summers types. Needed is a radically new strategy to put virtually the entire United States economy into some form of an emergency 'Chapter 11' bankruptcy reorganization where banks take write-offs of up to 90% on their toxic assets, that, in order to save the real economy for the American population and the rest of the world. Paper money can be shredded easily. Not human lives. In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal Government as the Constitution originally specified, and make the entire process easier for all. If this sounds extreme, perhaps revisit this article in six months again.
Sunday, December 14, 2008
“Freedom is just another word for nothing left to lose”.
- Kris Kristofferson, "Me and Bobby McGee.”
Times might change soon. ...the Comex is alerting various futures firms about the potential of a squeeze on the December contract and is advising the 840 December shorts to exit their positions. That is the remaining open position.
There have been 12,636 notices of delivery. The shorts have until December 31 to make delivery. Normally, they deliver early to take in cash and earn the interest. They must be delaying. As I understand the situation, that represents about 40% of the available gold at the Comex, and of course, someone could enter the scene late, buy Feb gold, and then spread into December, which would stun the shorts.
...this sort of alert is highly unusual and that the concern is real, not only for gold, but other commodities too like copper and palladium, as there is a good deal of talk of taking deliveries there too. But gold is the one in which the advice to cover went out.
This is an extremely productive development and could spur the price of gold up quickly as word spreads.
On a related note…
Silver…...watching the COMEX silver warehouse inventory. It has been dropping between 500,000 and 750,000 per day for the last few days. Yesterday 701,900 ozs were removed of which 693,808 ozs were from the dealers’ registered inventory. The total inventory now stands at 126,826,996 ozs and the dealer registered inventory is 77,756,068 ozs while the eligible inventory is 49,070,928 ozs. Just last week the registered category was above 80 Mozs. Delivery notices currently stand at 29.5 Mozs for December which, if taken off the exchange, will take a big hole out of 77Mozs!
BACKWARDATION THATSHOOK THE WORLD
By Antal E. Fekete
In spite of all the propaganda aimed at discrediting me and my theory of gold backwardation, what we are hearing is the shrill sound of the fire-alarm indicating that the house of the international monetary system is on fire. For many a year I have been warning all those who cared to listen that such a fire-alarm was coming sooner or later, and the consequences of ignoring it would be disastrous. Well, it is sounding loud and clear now, and guess what. Fire-fighters brazenly ignore it. Yet you can ignore it at your own peril.
What does it all mean? Not only does it mean that the market is willing to pay all your carrying charges involved in holding physical gold, but it is also willing to pay you (allegedly) risk-free profits for the privilege of relieving you from carrying the burden! “Let me take over your yoke just for a few days; I shall pay you handsomely for the honor” – so the clearing members of Comex plead.
It is as if the bank was paying all your utility bills without charging it to your account. Nay, the bank is actually offering you a bonus for you allowing it to do you the favor. Suppose, for the sake of argument, that all the banks in the world offered all their account holders to take over responsibility for paying their utility bills. Would it not evoke some searching questions about the hidden agenda of the banks? Wouldn’t people become extremely suspicious of the preposterous offer? Yet here we go, the futures market in gold, the world’s residual source of cash gold, is making the same preposterous offer, and nobody is asking questions. Timeo Danaos et dona ferentes (I fear my enemies most when they bring me gifts, Virgil, Aeneid, II. 49.)
I warn the world again that the futures market would not go to backwardation in gold if the house of paper money were not on fire. There is just no prima facie reason for a shortage in physical gold. A very large part of all the gold produced throughout history still exists in monetary form, sitting in vaults doing nothing. (Under the gold standard it used to be doing heavy-duty work in financing production and world trade.) Unlike all other commodities with the exception of silver, for gold the stocks-to-flows ratio is a high multiple (by contrast, the stocks-to-flows ratio of copper is a small fraction). And, on the top of privately held gold, there is central bank gold amounting to one quarter of all the gold ever produced since the dawn of history. Why are central banks unwilling to take advantage of risk-free profits by releasing gold? Could it be that, in possession of inside information, they have reason to be afraid that the regime of irredeemable currency may soon collapse and, with their gold gone, they don’t want to be left holding the bag? Could it be that the Babeldom of the debt tower is already crumbling, but the fact is being covered up?
The debt tower is toppling. Central banks work overtime printing money to plug the holes in the leaky foundation, but their traction that they could once take for granted is gone. The money they print goes into either gold hoarding or into government bonds. The monetary system has short-circuited and is in the process of burning out. Practically no money is going into the production of goods and services. The bloated economy is contracting fast. Great Depression II is upon us. The monetary system is past the point of repair. This is the story that the backwardation of gold is trying to tell those of us who have ears for hearing and brains for comprehending.
It can be seen that the $80 rise in the spot price from $740 to $820 during the week that just ended has not been able to compel holders of spot gold to exchange their holdings for a promise to deliver gold a mere 18 days later, the bait of ‘risk-free’ profit notwithstanding, in spite of the unprecedented discount on gold futures. To tell the truth, the promised profits are not risk free. The risk is that the gold will never be returned and those who have listened to the siren song will be left holding the bag.
Events of last week show the heroic resistance of the bulls: they have so far refused to listen to the sweet siren song of the clearing members. They unearthed the golden hatchet and have not let themselves be led astray from the warpath. On Thursday, December 11, 12,588 contracts in the December futures month (an increase of 139 contracts from the previous day) stood in line waiting for delivery. This is equivalent to 43% of registered gold in the warehouses! As is known, the clearing members have till December 31 to deliver; otherwise they have to declare “liquidation only”, effectively closing the gold window. If that happens, it would be a historical first, likely to cause a much bigger stir than the appearance of backwardation on December 2, which caused a yawn. The world would be shaken out of its lethargy. This backwardation would break the grip of the regime of irredeemable currency on the world.
The clearing members have used the carrot to no avail. Will they now use the stick, increasing margins on long positions to exceed the value of the underlying contract? We don’t know, but obviously they are hesitant to make a rash decision. Such a move could easily backfire. It would betray their desperation, which could provoke even more notices demanding delivery of physical gold.
More on Gold Backwardation
By: James Turk
If gold does trade in backwardation against US dollar for a protracted period (again, barring a very short-term and ephemeral event like the first two instances noted above in which a temporary demand for physical gold disrupts normal market activity), it will mean that a collapse of the dollar has begun. Think about it. How could gold go into backwardation for any prolonged period? If it does, it would mean that no one is willing to take the risk of selling their hoard and instead hold US dollars. It would mean that no one is willing to accept the risks that come with holding dollars while waiting until they can be used at a future date to exchange back into gold.
Those risks are:
1) the dollar can be created out of thin air by governments, and
2) holding dollars has counterparty risk.
The trillions of dollars of newly created bail-out money highlight the first risk, and the sad state of the banking industry today makes clear the second.
Physical gold has neither of these risks. So because of the greater risk of holding dollars, dollar interest rates are higher than gold's interest rates. In short, the higher interest rate currency is always in backwardation when the forwards are measured against a currency with lower interest rates.
In recent years, the politically correct thing to do is to call gold's interest rate a “lease rate”, which is unfortunate. If people recognized that gold has an interest rate because it is money, they would more quickly grasp the significance of a gold backwardation if it were to occur. The contango is gold's interest rate.
In summary, the market for physical gold is tight. The extraordinarily high premiums now being charged on coins and small bars is the most visible aspect of this incredible tightness.
This tightness in the physical market for gold could be a passing phenomenon, but then again, maybe not. It may be any indication that the gold market is profoundly changing, which will cause the price of gold to soar because the gold cartel is unable or unwilling to use any of its remaining inventory to cap the gold price at current levels, or because US dollar is becoming suspect. Then again, it is not unreasonable to conclude that both factors may be at work here. After all, the collapse in the US Dollar Index this month strongly suggests that the dollar’s 4-month bear market rally ended in November.
In any case, we’ll know for sure that the gold price is ready to soar if GoFo goes negative and remains negative. If that happens, take note of the old saying that a bird in the hand is worth two in the bush. Own physical metal and not paper.
Seven-fold increase in gold needed to avert debt depression
Dear Friend of GATA and Gold:
While it is almost a year old, a study of the enduring importance of gold in the world economic system by R. Peter W. Millar, founder of Valu-Trac Investment Research Ltd. in Scotland (www.valu-trac.com), seems ever more compelling, and Millar graciously has agreed to let it be shared with you.
Millar stresses the periodic upward revaluation of gold as the mechanism for defeating a deflationary debt depression at the end of an economic cycle. Millar writes:
"The first cycle unfolded as follows:
"-- Phase 1: Stability under a gold standard until 1914.
"-- Phase 2: Inflation until 1921, which resulted in a buildup of debt.
"-- Phase 3: Disinflation, which brought stability and allowed asset inflation until 1929, but encouraged a further buildup of debt.
"-- Phase 4: Instability after 1929 caused by deflation of assets from overpriced levels and exacerbated by excessive debt levels, leading to depression of economic activity.
"-- Phase 5: Monetary reform enabled by a revaluation of gold to overcome deflationary debt depression.
"In the second half of the 20th century we saw a repeat of the first three phases of the same cycle:
"-- Phase 1: Stability from 1944 to 1968 under a gold standard.
"-- Phase 2: Inflation from 1968 to 1981, which caused and justified another buildup of debt.
"-- Phase 3: Disinflation from 1981 until the end of the 20th century, and maybe to the present.
"However, it appears that Phase 4 (instability and ultimately deflation due to excessive debt) may have started. If so, Phase 5 (revaluation of the gold price to raise the monetary value of the world monetary base and hence reduce the burden of debt) becomes likely or inevitable. The extent of that revaluation would need to be major according to our calculations, probably by a factor of at least seven times, possibly up to 20 times the current price of gold."
The price of gold when Millar wrote his study, in May 2006, was about where it is tonight.
Millar's study is titled "The Relevance and Importance of Gold in the World Monetary System" and you can find it in PDF format here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Thursday, December 11, 2008
There Is No Fever Like Gold Fever
By Antal E. Fekete
Here is an update on the backwardation in gold that started on December 2 at an annualized discount rate of 1.98% and 0.14% to spot in the December and February contracts. It continued and worsened on December 8, 9, and 10 as shown by the corresponding rates widening to 3.5% and 0.65%. It is nothing short of awesome. This is a premonition of a coming gold fever of unprecedented dimensions that will overwhelm the world as soon as its significance is fully digested by the doubting Thomases. The worsening of backwardation must be viewed in the context of the gold price bouncing back from the lows of last week. It shows that the ‘gold bashing’ on Friday was done in the December contract. It is quite revealing that the spot price bounced back more than the futures price. The bulls are on the warpath. They have unearthed the hatchet. They have stopped eating from the hands of the clearing members.
The bottom line is that there is no fever like gold fever. It is akin to St. Vitus’ dance that swept through the Christian world just before the year 1000 A.D. affecting all the people who expected the end of the world to happen at the turn of the millennium. It was far worse than the mania that swept through the world affecting all the people who expected the 2K disaster to happen a thousand years later. The coming gold fever must be distinguished from tulipomania in February 1637, when one single tulip fetched the equivalent of 20 times the annual income of a skilled worker. Gold fever is as different from a bubble as real gold is from fools’ gold. It is visceral. It has to do with one’s instinct for survival. It has no patience with logical arguments. It is highly contagious, ultimately affecting everybody. A bubble that never pops.
Our present experiment with irredeemable currency can last only as long as it is able to support futures markets in gold. The declining gold basis is the hour glass: when it runs out and the last grain of sand drops, gold fever will bleed the futures markets of cash gold, and the days of the regime of irredeemable currency are numbered.
Backwardisation means big gold price rally coming!
‘Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.
Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks.
They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system.
Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days.
In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?
Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.’
Money-Market Fund Yields May Fall to Less Than Zero
Dec. 10 (Bloomberg) -- Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.
Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.
“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”
The U.S. Treasury sold $27 billion of three-month bills on Dec. 8 at a discount rate of 0.005 percent, the lowest since it started auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills yesterday at zero percent for the first time since it began selling that debt in 2001.
Bill Gross, manager of the world’s largest bond fund, said in a Bloomberg Television interview that the U.S. Treasury market is overvalued and has some “bubble characteristics.” Gross is co-chief investment officer at Pacific Investment Management Co., based in Newport Beach, California, and runs the $128 billion Pimco Total Return Fund.
Dollar Devaluation To Fix The Great Recession
A quick dollar devaluation would work wonders for submerged borrowers. Don't kid yourself: It could happen.
The problem with all these [bailout] ideas is the money is only directed at those who created or benefited from the problems. Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside?
Here it is. Stand back. World currencies should be devalued overnight.
It can be done on a country-by-country basis, but a coordinated devaluation would work best. A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.
It would even benefit those who purchased their homes responsibly, as the value of their homes would rise by the same 43%. The current course of throwing trillions of dollars at the culprits is without any benefit to those who acted responsibly.
Admittedly, this is not a solution without the price of inflation, but the inflation would be short-lived. The current course will ultimately cause massive inflation that cannot be accurately estimated, and it may not even solve the problem.
Currency devaluation proved effective in ending the Great Depression. In 1930, Australia was the first to leave the gold standard, immediately devaluing the aussie by more than 40%, and the economy quickly recovered. New Zealand and Japan followed suit in 1931, each with the same result. By 1933, at least nine major economies had enacted a devaluation of their currency by removing it from the gold standard, all of whom emerged from depression.
In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. America, like the others before, had its economy bottom and recover as a result. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.
US jobless claims rise; trade gap widens
NEW YORK, Dec 11 (Reuters) - The number of U.S. workers
filing new claims for jobless benefits surged to a 26-year high
last week, Labor Department data showed on Thursday, as a
deepening recession forced employers to cut back on hirings.
The U.S. trade deficit widened unexpectedly in October as
imports from China rose to a new record and oil imports
rebounded as prices fell by a record amount, a Commerce
Department report showed on Thursday.
U.S. Budget Deficit Widens to $164.4 Billion November
Dec. 10 (Bloomberg) -- The U.S. budget deficit in November widened for a second straight month as the government used taxpayer money to shore up the financial system by purchasing stakes in banks.
The excess of spending over revenue swelled to $164.4 billion last month compared with a gap of $98.2 billion in November a year earlier, the Treasury Department reported today in Washington. Government revenue fell 4.2 percent, while spending soared 24 percent.
“It’s absolutely going to get worse before it gets better,” said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. “We’re looking at a $1 trillion deficit, and that’s before the next stimulus package. If Treasury spends all of TARP, it could be $1.2 trillion to $1.3 trillion.”
Today’s number brings the deficit for the fiscal year that started in October to $401.6 billion, a record for the first two months of the government’s budget.
Tuesday, December 9, 2008
Point of no return: Interest on T-bills hits zero
NEW YORK – Investors are so nervous they're willing to accept the same return from government debt that they'd get from burying money in a coffee can — zero.
The Treasury Department said Tuesday it had sold $30 billion in four-week bills at an interest rate of zero percent, the first time that's happened since the government began issuing the notes in 2001.
And when investors traded their T-bills with each other, the yield sometimes went negative. That's how extreme the market anxiety is: Some are willing to give up a little of their money just to park it in a relatively safe place.
There's good news in all this for taxpayers: Low interest rates on government debt mean the United States is financing its $700 billion bailout of the financial system very cheaply. The Treasury has sold mountains of debt to pay for it.
But the trend also underlines stubborn anxiety in the financial market that could keep the economy sluggish for years to come, and it translates into stagnant returns for people who have their money in places like money market funds.
"There's a price for safety," said Peter Crane, president of money market mutual fund information company Crane Data LLC. "Down slightly is the new up."
Earning zero percent on an investment for a short while may not seem that dire for the average person. But a zero percent rate has serious consequences for the complex credit markets.
Negative Real Rates Will Drive Gold Prices Up
Real rates are the returns realized by bond investors after inflation is subtracted out. If you earn 5% in Treasuries, and inflation is running 3%, then you earn a 2% real return. Much of the 1.05x growth in your nominal capital is eroded by the relentless loss of purchasing power in the dollar. What you could buy last year for $1.00 now costs $1.03, so in terms of real goods and services you aren’t advancing as fast.
Normally real rates are positive. For putting their hard-earned capital at risk, debt investors deserve to earn a real purchasing-power return after inflation for their efforts. Even though they don’t accept much risk compared to stock investors, they still need to be fairly compensated for this risk. If they are not, they will invest less over the long term because it is pointless to risk scarce capital for a guaranteed loss.
Would you loan money to anyone if you knew you would take a real loss for doing so? Not if you are rational. When nominal interest rates are forced so low by central banks that real returns plunge negative, debt investing becomes a losing proposition. In such a hostile environment, debt investors gradually turn to gold. While bonds guarantee them a real loss, gold will at least keep pace with inflation to preserve the purchasing power of their capital.
To understand the interaction between real rates and gold, you really have to take the long view. Since it takes years for investors to perceive the impact of inflation and change their behavior accordingly, gold doesn’t react overnight. But eventually it does react, and this is very clear over a long-enough time slice. The longer real bond returns are poor or negative, the more capital gradually takes refuge in gold.
Obama Policy Good For Gold
Fresh evidence today of continuing U.S. monetary perfidy as Obama announces plans to build a better nest while continuing to hack at the tree in which it resides. How else to parody the incredibly mindless strategy of plunging the nation more severely into debt on what is arguably the brink of its own foreclosure?
As usual, mainstream media/perception management foils interpret the news as positive, and the industrials rally in applause. John Maynard Keynes is heard shouting his approval from the grave.
As of November 19, 2008, the total U.S. debt stood at $10.6 trillion, or $37,316 per person.
Bailout-mania and now infrastructure-mania will no doubt add significantly to that figure. While no dollar figure has been stipulated with Obama’s infrastructure development plan, his identification of “roads, bridges, internet broadband, schools, health and energy” as target segments represents the largest infrastructure investment in the United States since the 1950’s.
So how does this affect the upward pressure still building on gold? Well, besides the many reasons expressed on this web site on a daily basis, the continuation of the policy debasing the currency through endless printing diminishes the amount of gold that currency can purchase, and so the dollar value of gold expressed in that currency increases. At least, that’s what happens if there is no tampering with the price of gold.
The idea of suppression of the gold price as a mechanism of fiscal and monetary policy by the United States government continues to gain acceptance in the mainstream, as evidenced by articles published recently in the New York Post and New York Times.
Disregard the spot price as quoted by COMEX for a moment. Demand for physical delivery from futures contracts traders has risen from a traditional average of 1% to over 16% last Friday, and the price of gold for delivery in the future is cheaper than the spot price is now – a situation known as backwardation, and indicative of traders preferring retaining gold in favor of a paper profit. It is symptomatic of a confidence crisis building in the ability of COMEX to continue to deliver physical gold.
If COMEX does end up in default, the suppressive influences will be severely encumbered, if not completely overthrown, and the result may be the breakout of gold that has long been anticipated by contrarian writers.