Sunday, February 21, 2010

"Shouldn't great nations and great empires have great leaders? And yet, we look around. What do we see? Hacks. Glad-handers. Shills. Suits. Wonks. And of course...imbeciles."
- Bill Bonner, The Daily Reckoning

What a fascinating week just passed.

Gold in the Euro hit an all-time high four days running.

The Gold Cartel failed to knock Gold down with a rehash of forgotten IMF Gold sales news.

The Fed raised the meaningless "discount rate" to an even more meaningless 0.75% in the hopes they would convince creditors that they are serious about ending their easy money policy.

The Bank lending rate is falling at the fastest rate in history.

What does it all mean? The Europeans no longer trust paper money. The Gold Cartel is desperate to halt the rise in Gold price. The Fed is even more desperate as the world has begun to shy away from US Treasury debt, and it hopes to encourage continued purchases of the US' toxic soveriegn debt by forcing banks to seek money in the private sector instead of from the Fed. Failure is NOT an option, but likely nonetheless.

Record Short Euro Positions Push Gold to New High
On Friday, short positions against the euro on US exchanges rose to US$7.6-billion, according to the U.S. Commodity Futures Trading Commission. This is the largest ever recorded net short position against the euro.

Gold Price Hits Record High Against the Euro
GOLD PRICE NEWS - The gold price in terms of the euro reached a new all-time high of 828 per ounce as the price of gold recovered its entire $20 overnight decline and the euro weakened against the U.S. dollar. While gold prices remains over $100 lower than the record high of $1,226.50 per ounce in dollar terms, the significant weakness of the euro since early December 2009 has boosted the price of gold in euros to its fourth consecutive daily new high. For the week the gold price finished higher by $25, up $26 year-to-date.

In addition to the euro, the gold price came within 1.7% of its all-time high of 732.45 against the British Pound and has outperformed other precious metals, base metals, and commodities - including silver, platinum, oil, and copper - over the past several months. The recent rally in the price of gold against numerous fiat currencies speaks to the underlying strength of the gold bull market, as nations across the globe continue to debase their currencies in an effort to fuel an economic recovery.

IMF Gold Sales vs. Alchemy of Gold Futures: What’s the Impact on Future Gold Prices? [MUST READ]
The recently announced IMF sale of 191.3 tonnes of its gold reserves, though it caused an immediate sharp knee-jerk reaction in gold futures markets, will have a negligible effect on the long-term price of gold. Here’s why.

In December, 2009 the commercial bullion banks that serve as agents for the leading Western Central Banks were net short 303,791 contracts of gold. Each COMEX gold futures contract represents 100 troy ounces, so the Commercials were net short 30,379,100 troy ounces of gold. With the average price of gold $1,134.72 per troy ounce in December 2009, this net short commercial position represented $34.47 billion worth of gold. There are 32,150.74533 troy ounces in one metric tonne. So 30,379,100 troy ounces/ 32,150.74533 troy ounces = 944.90 metric tonnes of gold. Since gold contracts are supposed to be good for physical delivery, the commercial bullion banks that were short nearly 38% of annual world production of gold this past December should have had 944.90 physical metric tonnes of gold in their vaults to back up their short position at that time. In reality, this situation never exists.

The amount of physical gold that bullion banks deliver through COMEX on a daily basis is negligible compared to the often massive historical short positions that they have maintained for decades. For example, during a two-week span across January and February, COMEX arranged for the physical delivery of 543,500 troy ounces of gold with their contracted warehouse depositories, a figure that represents an average of just 38,786 troy ounces of gold per day or 0.18% of the current net short position. At this rate of delivery, it would take the COMEX more than 1.5 years to deliver all the gold represented by the current net commercial short position should the holders of long contracts ask to settle in physical delivery.

Through the use of futures markets, the Commodities Futures Trading Commission [CFTC] has granted bankers a mechanism to perform alchemy and turn paper into gold on the COMEX by allowing them to establish obscene short positions that represent 25% to nearly 40% of annual gold production at times, while simultaneously allowing them to renege on their fiduciary responsibility to actually physically possess the gold represented by their short positions. In other words, the CFTC has allowed gold to operate under the principles of the fractional reserve banking system on the COMEX futures markets.

Bernanke Hikes the Discount Rate: zzzzzzzzzzz...
By Dave Kranzler, The Golden Truth
I described in my post on Feb 10 Link, why Bernanke will do nothing more than bluff about draining liquidity from the system and raising short term rates. I mentioned that raising the discount rate was his loudest toothless tiger in this regard. Well, Banana Ben raised the discount rate, the rate which banks borrow directly from the Fed. Here's my description of why this act is meaningless, useless and ineffective - which means he really does not want to do anything other than give the impression to our massive foreign creditors that he's not really a fiat currency main-lining drug addict:

Bernanke's first proposal would be to raise the discount rate. The discount rate is the rate charged by the Fed when banks borrow directly from the Fed. Raising the discount rate is meaningless right now as a tool to regulate systemic liquidity because the banks have plenty of money to lend out in the form of excess reserves. Excess reserves are bank deposits kept at the Fed in excess of reserve requirements. As of 12/31/09, banks had around $1.1 trillion in excess reserves. The banks thus have no need to borrow money from the Fed - and thus will not be affected at all by a rising discount rate. As of Feb 3, Discount Window loans were an insignificant $14.7 billion. As you can see, the discount window is not even a source of bank liquidity in comparison to the liquidity the banks already have on deposit at the Fed. Raising the discount rate would be about as useful as taking away ice machines in Antartica. In Banana Ben's own words today (Feb 10): raising the discount rate is “not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy." So why even bother mentioning this unless Banana Ben's intent is to remain consistent with his unstated policy of blowing smoke?

The fact of the matter is that Bernanke has two choices: he can raise real rates and try to drain liquidity from the system, which will lead to a rapid collapse our economy, OR he can play "poker" with the market and send out false signals. Judging from his inability to hide lies from his facial expressions when he's in front of Congress, he's a crappy poker player. He knows full well the consequences of both alternatives, but why not try to kick the can down the road and let his successor deal with it or hope for Moses to come down from Mt. Sinai and deliver another miracle? In the meantime expect Banana Ben to keep delivering a series of empty threats

Foreign Holders of Treasuries: The Love Is Gone
By Andrew Horowitz
The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

Jitters over China’s waning taste for T-bills
By Robert Cookson and Michael Mackenzie, Financial Times
If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.

As the biggest and most liquid pool of assets in the world, the US Treasury market lies at the heart of the global financial system and allows the American government to finance its trillion-dollar budget deficits. Until recently, China has been the largest foreign official holder of US debt.

That is why the latest release of Treasury International Capital (Tic) data, showing that China’s holdings of Treasuries fell by a record amount in December, has caused something of a stir.

China’s holdings fell by $34.2bn to $755.4bn from the previous month, prompting renewed jitters that the country was diversifying from Treasuries over fears about their future value.

US bank lending falls at fastest rate in history
By Ambrose Evans-Pritchard
David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.

Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken.

Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.

"It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.

Treasury Yield Near 6-Week High Before Durable Goods, Auctions
By Wes Goodman
Feb. 22 (Bloomberg) -- Treasury yields were near the highest level in six weeks ahead of $126 billion in government debt sales this week and U.S. reports forecast to show sales of homes and durable goods improved last month.

The government is scheduled to sell $8 billion in 30-year Treasury Inflation Protected Securities today. It will also auction $44 billion of two-year debt tomorrow, $42 billion in five-year securities on Feb. 24 and $32 billion of seven-year notes on Feb. 25.

“The deficits are going through the roof and the Treasury auctions are not getting any smaller,” said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by Liechtenstein’s royal . “We’re bearish” on Treasuries, he said.

Taleb Says ‘Every Human’ Should Short U.S. Treasuries
By Michael Patterson and Cordell Eddings
Feb. 4 (Bloomberg) -- Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific.

Gold bid up to 1130 in early Asia trading this evening, resistance overhead at 1135. Silver bid up to 16.55, resistance overhead at 16.73. Short squeeze in Euro may be looming at 1.3747. Gold Cartel desperate to hold Gold below 1100 for options expiration Tuesday with over 5000 contracts in the money above that handle, Gold support at 1113 and 1098. Silver to shadow Gold, support at 16.23 and 15.81.

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