Sunday, December 12, 2010

Why Are The Lambs Screaming Clairice?

The Precious Metals were held in check Friday on "fears" of a Chinese interest rate increase. Instead, the Chinese once again raised banks required reserves ratio. This is the wise way to combat excess liquidity in the financial system. The Chinese have learned a great deal from the mistakes of the US Federal Reserve. Manipulating interest rates is a fools game, and leaves your banks exposed to collapse...unless of course theyare bailed out by the taxpayers.

China raises banks' reserve ratios again
By Zhou Xin and Simon Rabinovitch
(Reuters) - China's central bank on Friday increased the amount of money that lenders must keep on reserve for the third time in one month, a move to mop up excess cash in the economy and rein in inflation.

But the decision to raise banks' required reserves rather than interest rates means that officials have opted for a milder form of monetary tightening for the time being, suggesting that they believe prices pressures are still well within their ability to control.

The 50 basis point increase, which takes effect on Dec 20, will leave required reserve ratios at 18.5 percent, a record high for the majority of the country's banks.

The People's Bank of China offered no explanation.

"We expected the RRR rise this time, and I think it is perfectly timed to help manage excessive liquidity," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.

"There is still much scope for the central bank to raise reserve ratios next year. We expect several increases in the first quarter of next year and the ratio could reach as high as 23 percent in 2011," he added.

http://www.reuters.com/article/idUSTRE6B91QU20101210

China Interest-Rate Speculation Splits Analysts, Former PBOC Official Wu
By Bloomberg News
China can’t raise interest rates because of the risk of attracting inflows of cash that would fuel inflation, said Wu Xiaoling, a former deputy governor of the central bank.

“The global low interest-rate environment prevents China’s central bank from raising interest rates,” Wu said in a speech at a hedge fund conference in Shanghai today. Emerging markets face capital inflows and “excessive money supply is one of the important reasons for China’s inflation,” she added.

Economists at firms including Australia and New Zealand Banking Group Ltd. and UBS AG. have, in contrast with Wu’s view, said that China is likely to raise rates this weekend. China’s central bank yesterday increased lenders’ reserve requirements for the sixth time this year as part of efforts to curb inflation that rose to a 28-month high in November.

In October, the central bank pushed up lending and deposit rates for the first time since 2007.

Analysts have focused on the possibility of another increase this weekend because of today’s release of November data. Consumer prices rose 5.1 percent from a year earlier and producer prices jumped 6.1 percent, a statistics bureau report showed.

http://www.bloomberg.com/news/2010-12-11/china-interest-rate-speculation-splits-analysts-former-pboc-official-wu.html

China vows stable growth, inflation management
By Elaine Kurtenbach
SHANGHAI (AP) -- China's leaders wrapped up an annual economic planning meeting Sunday with a pledge to cool surging inflation while shifting the economy toward more stable, balanced growth.

The vow to keep the economy on an even keel came a day after the government reported that inflation jumped to a 28-month high in November, despite a crackdown on speculation and repeated moves to curb the flood of money circulating in the economy from massive stimulus spending and bank lending.

A statement announcing the end of the conference, held each year in early December, reiterated previous pledges to support farmers, fight poverty, promote clean energy and various other sweeping goals. But the broad policy blueprint included no specific new policy measures.

The statement also reiterated Beijing's earlier promises to carry on with reforms of its tightly controlled currency regime -- a longtime source of friction with the U.S. and other trading partners that contend the Chinese yuan is undervalued against other major currencies, giving its manufacturers a price advantage in other markets.

Offering no hint of a change in policy direction, it just said China will keep the exchange rate "basically stable at a reasonable and balanced level."

http://finance.yahoo.com/news/China-vows-stable-growth-apf-3756796436.html?x=0&sec=topStories&pos=3&asset=&ccode=

The Fed may buffalo Americans into believing there is no inflation, but they exporting it around the globe. Chinese inflation is a direct decendent of Fed money printing. To protect themselves, China is going to have to allow their currency, the Yuan, to appreciate faster than they might desire. A rising Yuan will lead to rising Precious Metals prices. You can take that to the bank.

NOTHING would give Precious Metals Bulls more to cheer about than the destruction of JP Morgan. JP Morgan, the long arm of the US Federal Reserve, are today staring at the possibility that they may be vaporized within weeks. Not only is their massive short position in Silver about to blow a hole in them, but the tumbling US Treasury market may be about to expose the fraud they represent at the Fed.

A question often asked is, "Who will bail out the Fed?"

A CRIMEX default coupled with a 4% yield on the 10 year Treasury might be just the combination of events to overwhelm JP Morgan, and blow them off the face of the planet.
Only then can we speculate on who will bailout JP Morgan [The Fed] ...the Chinese?

Something’s Wrong in the Silver Pit: But It’s Much Bigger than J.P. Morgan
By: Rob Kirby
Question: There are a total of 417 Billion notional in Gold derivatives outstanding – AND THE GOLD / SILVER Price RATIO is 49:1 – then WHY are outstanding notional silver derivatives 127 Billion???? These BIS numbers suggest that the proper gold / silver ratio should be roughly 3.3:1 or silver priced TODAY at 1,400 / 3.3 = 424.00 per ounce.

Now, let’s take a peek at what the U.S. Office of the Comptroller of the Currency tells us about “other precious metals” held by U.S. Commercial Banks:

OCC data tells us that J.P. Morgan and HSBC constitute 13.5 billion worth of the BIS’s reported total of 127 billion of derivatives in “other precious metals”. That’s about ONE TENTH of the total. WHAT ABOUT THE OTHER 90 % ??????

Note: Even if we compare the OCC totals for silver versus gold derivatives from the table above – OCC data is supportive of a “proper” gold / silver ratio of 131.6 / 13.6 = 9.7 This implies a silver price of 1,400 / 9.7 = 144.00 per ounce of silver.

Coincidentally, or perhaps not, COMEX open interest in gold futures is roughly 600K contracts @ 100 oz. per contract that is roughly 60 million oz of gold open interest. COMEX open interest in silver futures happens to be about 135k contracts @ 5,000 oz per contract which is roughly 650 million oz of silver open interest [note that silver open interest is not quite 11 times the open interest of gold]. So, again I ask, why is the gold / silver ratio at 48: 1?????

***For those who are not aware, silver naturally occurs in the earth’s crust approximately 7 – 10 times more frequently than gold.

Now, let’s take a look at ALL Derivatives of U.S. Commercial Banks as reported by the OCC:
Total Derivatives at $223.376 TRILLION!

Take note and remember that the breakout provided – above - by the OCC was for Commercial Banks ONLY.

Finally, let’s now look at the ONLY OCC data table depicting ALL Derivatives held by U.S. Bank Holding Companies: $294.750 TRILLION!

Conclusions:

Conclusions:

The BIS tells us that total global outstanding “other precious metals” derivatives are 127 billion.
General market wisdom [gleaned from OCC Commercial Bank data] suggest that J.P. Morgan and HSBC are the two dominant players in silver [other precious metals]

Yet, the U.S. OCC tells us that J.P. Morgan and HSBC combined – make up 13.577 billion of the 127 billion BIS total [roughly 10 %].

The U.S. OCC tells us that Morgan Stanley and B of A and Goldman have an additional combined 70 TRILLION in derivatives – at the Bank Holding Company level – but they give us NO HINT as to what portion of these totals consist of precious metals activity. We are left to assume that this is because the OCC is only mandated to regulate Commercial Banks – while Bank Holding Companies fall under the purview of the Federal Reserve.

Unless J.P. Morgan and HSBC are LYING to regulators as to the extent of their silver market activity – there are other MASSIVE players in the silver price suppression game. Who ever these ‘players’ are – metaphorically, they MUST BE BLEEDING FROM EVERY ORIFICE with silver’s parabolic run up in price over the past few months.

Most likely among American entities are MORGAN STANLEY, B of A and Goldman Sachs – since together they are operating a 70 Trillion derivative “BLACK BOX” about which we know LITTLE to NOTHING as it pertains to precious metals.

Any way you slice it – precious metals data reporting on the part of American regulators is atrocious. Simple MATHEMATICS tells us a gold / silver ratio at 48:1 is EXTREMELY contrived and REEKS of manipulation on the part of the Federal Reserve and the Banks they are charged with regulating.

Got any physical Gold and/or Silver yet?

http://news.silverseek.com/SilverSeek/1292004828.php

The Elephant In The Room
by Rob Kirby August 4, 2009
This following article was an address by Rob Kirby at the Gold Anti-Trust Action Committee Inc., GATA Goes to Washington -- Anybody Seen Our Gold?, at the Hyatt Regency Crystal City Hotel, Arlington, Virginia, Saturday, April 19, 2008. The original address has been updated and added to since new information has come to light.

My name is Rob Kirby – proprietor of Kirbyanalytics.com, proud GATA supporter and frequent contributor to Bill Murphy’s LeMetropolecafe.com. I would like to extend a warm welcome to GATA delegates from all over the world to Washington, D.C.

I’d like to delve into the numbers, or math, showing how J.P. Morgan’s derivatives book cannot be ‘hedged’.

As per their call reports filed with the Comptroller of the Currency’s Office, we know J.P. Morgan’s derivatives book grew by a cancerous 12 Trillion from June 07 to Sept. 07. The OCC’s Quarterly Derivatives Report serves as the public’s only peek into the opaque and murky world of derivatives-flim-flammery.

Flim Flammery is the understatement of the century. In fact, dealer notionals have EXPLODED parabolic-ally in recent years while END USER demand has been static and virtually non-existent.

http://www.financialsensearchive.com/fsu/editorials/kirby/2009/0804.html


Global bond rout deepens on US fiscal worries
By Ambrose Evans-Pritchard
Agreement in Washington on a fresh fiscal package has set off dramatic rise in yields of US Treasuries and bonds across the world, threatening to short-circuit any benefits of stimulus. The bond rout raises concerns that the US authorities may be losing control over events.

The yield on 10-year Treasuries – the benchmark price of money worldwide and the key driver of US mortgages rates – has rocketed to 3.3pc, up 35 basis points since President Barack Obama agreed on Monday to compromise with Senate Republicans on tax cuts.
The Treasury sell-off has ricocheted through the global system, triggering bond sell-offs in Asia, Europe and Latin America. Japan's finance ministry braced as borrowing costs on seven-year debt jumped by a sixth in one trading session, while German Bunds punched through 3pc.

David Bloom, currency chief at HSBC, said it is hard to disentangle whether investors are shunning bonds because they expect US stimulus to boost growth next year, or whether they are losing patience with profligacy in Washington.

"If this is all about growth, that's brilliant. But if yields are rising because people think Amirca's fiscal situation is unsustainable, then its armaggedon," he said.

"The US can get away with this only because it is the world's reserve currency. This would be totally unacceptable in any other country. We think these problems will start to crystallise for the US in the second half of 2011, once the European debt crisis has stabilised," he said.

The warnings were echoed by Li Daokui, a rate-setter for China's central bank. "The focus of the market is still in Europe, but we must be aware that the US fiscal situation is much worse than in Europe," he said.

The US tax deal adds $1 trillion of stimulus over two years, according to BNP Paribas. America's budget deficit will remain stuck near 10pc of GDP, not just in 2011 but also in 2012. This will push gross public debt to 110pc of GDP under the IMF definition, near the brink of a debt compound spiral. The contrast with fiscal tightening in Europe has become starkly evident.
http://www.telegraph.co.uk/finance/economics/8190059/Global-bond-rout-deepens-on-US-fiscal-worries.html

On Dec 8th, Li Daokui, an advisor to China’s central bank warned, “we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. When the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, US Treasury bonds and the US-dollar will experience considerable declines,” he said. “Oh what a tangled web we weave, when first we practice to deceive,”-- Sir Walter Scott.
http://news.goldseek.com/GoldSeek/1291842000.php

Harvey Organ sums up bond "armaggedon" in his Daily Gold & Silver Report:

JPMorgan is by far the largest derivative player in the world and they are the largest player in interest rate derivatives. Most of these are in the field of interest rate swaps .In simple terms, our hero JPMorgan, on orders from the Fed buys a trillions of dollars of long bonds in the future and at the same time sells or shorts trillions of dollars of short term money of say 30 days or 90 days also in the future. The long bond was purchased at say a yield of3.4% to 4% and the short term money was shorted at a yield of .05% per annum or roughly par.

The huge purchases of these swaps (buy long term bonds in the future and short 90 day treasuries in the future) lowers the price of real treasury bonds as this stimulates the purchase of these bonds at the present time. This is why the bond vigilantes were nowhere to be seen in the states. It will also explain why our camp knew it was impossible for interest rates to rise as this would blow up JPMorgan.

Now we see that the long bond yield is rising which is putting much pressure as losses mount on JPMorgan. They gain nothing from the short end as they shorted at 100 cents on the dollar and that is today's price.

The real risk to JPMorgan is the speed of which long bond yields rise as they cannot get out of their contracts. This will probably be the spark that ignites inside a coal mine. A yield of say 5% would create a 1.6% loss of over 640 billion dollars (they state, I believe, a notional 90 trillion interest rate swaps so 45 trillion on the long end and 45 trillion on the short end). That would blow up JPMorgan and create havoc and collateral damage equal to a neutron bomb in the financial area of Wall Street.

Say goodbye to the bond bull market
By Bill Fleckenstein, MSN Money
Signs of a top in bond prices could set the tone for investors in 2011. The government may start having trouble funding its debt, taking away the Fed's printing press.

A funding crisis refers to the inability of a country to finance itself without resorting to outright money-printing. This can lead to a vicious cycle of currency depreciation, rising interest rates, poor economic performance and poor investor sentiment, all of which feed on each other in a downward spiral. A funding crisis can end when proper monetary and fiscal discipline is restored, usually at the expense of severe economic hardship."

I have been using the term "funding crisis" regularly since the fall of 2008, and I penned the following definition in May 2009:

"If the dollar is called into question . . . and if the Fed's monetization cannot lower rates (and in fact causes them to rise, due to the consequences of money printing), then the Fed is trapped. The more it tries to solve the problem with money printing, the worse it all becomes."

Not to labor excessively over defining terms, but I think it is critical for investors to be able to identify the signs of a funding crisis.

To do that, they need to know what it means in the financial world -- in this case, the bond market, an arena that can be confusing to follow.

The key concept to understand is that a funding crisis occurs when the appetite of debt buyers (that is, bond buyers, aka lenders) for what the debt seller has to offer falls off significantly, or when potential buyers will risk lending the money (buying the bonds) only at a much higher interest rate.

Thus, a funding crisis is very much the free market's assessment of the debt seller's financial state of affairs.
http://money.msn.com/investing/say-goodbye-to-the-bond-bull-market-fleckenstein.aspx

KWN Source - Gold Will Move $150 Higher Within 5 Weeks
By Eric King, KingWorldNews.com
The contact out of London has updated King World News on the massive Asian buyers which have been accumulating both gold and silver. The London source stated, “A bunch of the weak hands are now on the short side of this market. We are very close to a floor because of the massive Asian buying. People have to remember these Asian buyers are now controlling the gold and silver markets, it is not the little guy.”

The London source continues:

“It’s all about the bond auctions, the bond fell off a cliff. In the derivatives market you’ve got JP Morgan playing the bond market at the behest of the Fed, going long 30 years versus selling short-term paper. They buy 30 year paper and then immediately hedge themselves by selling the 30, 60 and 90 day paper. It’s how they keep interest rates down, it’s how you do it.

The only reason interest rates are not in double digits in the US is because of this game. These guys are short front month paper. If this (the bond market) actually fell much longer, JP Morgan could be wiped out, I mean they would be liquidated. The Fed cannot allow them to do that. We’re witnessing history here.

Money flowing out of bonds is going into precious metals. So what they are doing is trying to paint the tape and make it look like a double-top in gold, with silver also retreating. Open interest went up into the decline, this is a gift (the decline). Asian buyers are laughing, we’re like a cartoon to them. They cannot believe how orchestrated this is.”

Where do you see a floor on silver?

“I think to go through $27 is virtually impossible, it would be suicide. I don’t think it will even get there. They are getting very cheeky even taking it below $28. They are not going to push it below $27 because they would just lose too much physical.

All that’s happening here is the Fed is freaking out because the bond market is collapsing and they want to indicate that everything is fine, and certainly that precious metals is not your alternative. Meanwhile, the Asians will continue to buy any dip and keep adding to their position. For what it is worth, Jim Rickards is correct, the Asians are doing their buying through secret agents.”

What about gold?

“As far as the gold market is concerned, gold will be $150 higher from here within five weeks.”
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/12/9_KWN_Source_-_Gold_Will_Move_$150_Higher_Within_5_Weeks.html

Long Term Interest Rate Rises Should Support Higher Gold Prices
http://www.goldcore.com/
There is some non-evidence-based analysis that asserts that gold prices will fall when interest rates rise. History and markets would suggest otherwise. Gold is correlated with interest rates - meaning that over the long term when gold prices rise, interest rates tend to rise also. Conversely, when gold falls, interest rates tend to fall.

This makes economic sense as gold prices and interest rates rise when there is challenging inflationary, monetary or systemic macroecnomic conditions and fall when these conditions are more benign.

Evidence and market history would suggest that gold prices will continue to rise until interest rates return to more normal levels. Real interest rates - the yields investors earn over the actual rate of inflation (not the artificially low numbers provided by government bureaucrats) - will have to be solidly positive. Which, of course, is a big problem given the sheer magnitude of the outstanding consumer, mortgage, municipal, state and Federal debt in the US and other debt laden major economies. Rising rates will see debt servicing costs increase and possibly more government debt, it will likely lead to property markets coming under severe pressure again and a snuffing out of the already fragile economic recovery.

Also, it is worth remembering that the US was the world's largest creditor nation in 1980. Today the US is the world's largest debtor nation with a national debt which is surging to nearly $14 Trillion. When President Bush took power in 2000, the US National Debt was only some $5.7 trillion - it has surged by some 145% in just 10 years. Meanwhile, since 2001, long-term unfunded liabilities to Medicare, Social Security Trust Fund and other long term commitments have ballooned from about $20 trillion to an unaffordable more than $54 trillion.

The fiscal problems facing the US today are far larger than those in the 1970s and this is why gold is extremely likely to at least surpass its adjusted for inflation high in 1980 of $2,300 per ounce and to comparitive price levels in other fiat currencies in the coming years.

http://news.goldseek.com/GoldSeek/1291903200.php

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