Monday, November 2, 2009

Who's Foolin' Who?

January 21, 1930
"Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction." - News dispatch from Washington.

Even Evening News Is Growing Skeptical
By: Rick Ackerman, Rick's Picks
Wall Street traders and speculators evidently decided the 3.5 percent GDP growth figure released by The Guvvamint on Thursday wasn’t such great news after all. On Friday the Dow gave back all 200 points of the previous day’s gains, plus 50 more. We’d have to concede that the news media played a positive role in making this a “teaching moment” for the poor saps who actually believe the economy is recovering. Instead of the usual cheerleading, network news anchors emphasized that virtually all of the dubious growth had come from Cash for Clunkers and a massive infusion of fiscal spending. This most surely played a role in Friday’s selloff.

How can a revival of consumer spending be the key to any recovery? The very word “consume” – as opposed to “invest” – should raise a yellow flag. The belief that consumption is the key to a strong economy is so deeply ingrained that few Americans even question that it has become the basis for all economic decisions made by the federal government. But popular delusion is at a tidal crest when it views pumping up home prices and retail sales as government’s most important domestic role. We might have expected economists to know better, and to help lead us out of the woods, but for the fact that credit-based consumption has become their credo as well.

Gold Market Reaching The Breaking Point
by Eric deCarbonnel
In order to secure gold at the lowest possible price, US investors are turning to the complex, lengthy process of taking delivery of gold futures contracts. By buying gold contracts in deliverable months and wait for them to expire, sophisticated investors are emptying COMEX warehouses. The incredible hassle of trying to pry gold out of Comex warehouses appeals to investors because no other place in the US offers a price equal to the Comex exchange. Nothing even comes close.

...even if Comex warehouse data is to be believed, there is only 66 tons of registered gold backing 1465 tons of gold promised for future delivery. So according to official data, there only enough gold to cover 4.5% of outstanding Comex gold futures contracts.

Like Comex warehouses, London gold vaults are being emptied. Hong Kong is pulling all its physical gold holdings from depositories in the UK and moving their $63 million worth of gold home to newly built vaults near the city's airport. Dubai is also planning to withdraw its gold from London. Meanwhile, private investors and Swiss ETFs continue to move gold out of London. On top of investor demand prying gold out London and COMEX vaults, Germany and Switzerland are reportedly demanding the return of their custodial gold from the US. In the face of this onslaught of demand, the US/UK gold markets are crumbling.

Basically, the gold market operates on a fractional reserve basis. On average there are several claims of ownership on each gold bar conforming to London Good Delivery (LGD) standard on the "pool" of gold which acts as liquidity for the massive OTC gold trade based in London. Similarly, there are several claims of ownership on the gold bars in Comex wherehouses. If a sufficient number of market participants become concerned about this (which is happening) and there is a stampede to take delivery of physical bullion, the entire gold market will come crashing down, taking most of the global financial system with it. Market failure isn't a risk, it is a certainty. The unregulated gold market is an accident waiting to happen.

IMF Sells Gold to India, First Sale in Nine Years
Nov. 3 (Bloomberg) -- The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first sale of the precious metal in nine years.

The transaction, which involved daily sales from Oct. 19-30 at market prices, is in the process of being settled, the IMF said in a statement yesterday. The average price in the sales to India was about $1,045 an ounce, an IMF official said on a conference call with reporters. Gold for immediate delivery rose in Asia, approaching a record $1,070.80 an ounce.

“The most important thing is that people want gold even at these prices,” said Ghee Peh, head of mining research, with UBS AG in Hong Kong. “There’s good support for prices for now” from the IMF’s disposal of bullion, he said.

The sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low- income countries. Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets as the dollar loses value against other currencies.

Central Banks Will Become Net Buyers of Gold, WGC CEO Says
Nov. 2 (Bloomberg) -- Central banks will become global net buyers of gold, the World Gold Council’s chief executive officer said today at a conference in Edinburgh.

“I believe that central banks will be net buyers over time,” Aram Shishmanian told the conference.

India Buys HALF IMF’s 403 Tonnes
By Warren Bevan
The program was said to have taken place between October 19 and
October 30. That is very intriguing since the options on gold expired over that
period and as is common gold fell pretty hard.

The price paid was said to have been marked to the market on an equal
daily basis for the ten business day period in order for the transaction to be
completed. That would have been 20 tonnes per day sold at market prices.

The thought that immediately came to mind was that Barrick said they just
bought 1 million ounces back for their hedge book but that only equals between
31 and 32 tonnes so any connection thereseems implausible at the moment.

The IMF sale was said to be a part of the latest Washington Agreement and I
suppose it could be classified as such. But the fact that the Indian Central Bank
bought such a large amount so quickly shows just how in demand physical gold

It’s starting ladies and gentlemen. Central banks will be, or are, clamouring over each other for physical gold and as Paul Tudor Jones put it there simply won’t be enough gold to go around in a
few years when it’s really needed. Also Barrick who is notoriously well connected through their impressive compilation of board of directors mentioned they could well cover their hedges well before their 1 year timeline. While they have been dead wrong to date this panic to get out of the hedges at all costs now is a huge signal. A hugely bullish signal. Got Gold?

The Great Hoax of 2009-2010
by Martin D. Weiss, Ph.D.
Jim Grant, originator of the “Current Yield” column in Barron’s and founder of Grant’s Interest Rate Observer, demonstrates not only that today’s recovery is bought and paid for by Washington … but also that the relative size of Washington’s intervention is even larger than you might think.

In the ten prior U.S. postwar recessions, the government responded, on average, with fiscal stimulus of 2.6 percent of GDP plus monetary stimulus of another 0.3 percent of GDP.
Combined stimulus: only 2.9 percent of GDP.

In contrast, during the current recession, the government has counter-attacked with fiscal stimulus amounting to an estimated 18 percent of GDP … plus monetary stimulus of an estimated 11.9 percent of GDP.
Combined stimulus: a whopping 29.9 percent of GDP.
That’s an unprecedented — and unimaginable — ten times more than the average stimulus of prior recessions.

Grant’s comparison of today’s government stimulus with that of the Great Depression is even more striking:

He points out that, in the early 1930s, GDP fell 27 percent, while the government responded with monetary and fiscal stimulus adding up to 8.3 percent of GDP.
Thus, using Grant’s numbers, I calculate that, for each percentage point our economy contracted, the U.S. government came forward with 0.31 percentage points of stimulus.

In contrast, in the current recession, U.S. GDP contracted 1.8 percent (at the time of Grant’s study) … while, as we just noted, the government’s stimulus has amounted to 29.9 percent of GDP.
Thus, for each percentage point that our economy contracted, the U.S. government has jumped in with 16.61 percentage points of stimulus.


Relative to the disease, the government’s “cure” for the Great Recession today packs 54 times more firepower than the government’s response to the Great Depression of the early 1930s. And this does not even include trillions more in U.S. government guarantees to shore up the financial system.

Proponents of the government’s intervention may try to convince you “this is what it takes to avoid another depression: We’ve got to attack the contagion with big guns!”

However, Grant worries, rightfully so, that the cure may be far worse than the disease:

“If it’s taking this much to revive today’s economy,” he asks, “what kind of jolt might be necessary to succor tomorrow’s? An even bigger shock, we surmise, if tomorrow’s economy is no less encumbered than today’s. But it’s almost certain to be more encumbered, since the active ingredient of the Bush-Obama palliative is credit formation, the very hair of the dog that bit us. Skipping down to the bottom line, we renew our doubts as to the staying power of the paper currencies and to the creditworthiness of the governments that print them.”

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