Monday, April 9, 2012

No If, Ands, Or Buts: Central Banks Will Have To Keep Printing Money For A Long Time

Gold crash on Fed tightening and euro salvation looks premature

Until the rising reserve powers of Asia, Russia and the Gulf regain trust in the shattered credibility of the world’s two great fiat currencies - if they ever do - gold is unlikely to crash far or remain in the doldrums for long. `Peak gold’ cements the price floor in any case.

It has been an unsettling experience for late-comers who joined the gold rush near all-time highs of $1923 an ounce last September. The slide has become deeply threatening since the US Federal Reserve took quantitative easing (QE3) off the table six weeks ago - or appeared to do so - and signalled the start of a new tightening cycle. Spot gold ended the pre-Easter week at $1636.

“The game has changed,” says Dennis Gartman, apostle of the long rally who now scornfully tells gold bugs that he is just a “mercenary”, not a member of their cult. “They genuflect in gold’s direction; we merely acknowledge that it exists as a trading vehicle and nothing more. There are times to be bullish, and times to be bearish … to every season, as Ecclesiastes tells us.”

Gold has risen sevenfold from its nadir below $260 in 2001, that Indian summer of American hegemony, when the 10-year US Treasury bond was the ultimate “risk-free” asset , and Gordon Brown ordered the Bank of England to auction half its metal.

The stock markets of Europe, America, and Japan churned sideways over the same decade, and that precisely is the clinching argument against gold for contrarian traders. You avoid yesterday’s stars like the plague. “Gold is far too popular,” said James Paulsen from Wells Capital. It has reached a half-century high against a basket of indicators: equities, treasuries, homes, and workers’ pay.

Each interim low in price has been lower, and chartists tell us that gold’s 100-day moving average has fallen through its 200-day average for the first time since March 2009. It is a variant of the `death’s cross’. Ugly indeed, though Ashraf Laidi from City Index said the more powerful monthly trend-line remains unbroken.

Whether or not the global economy has really put the nightmare or 2008-2009 behind it and embarked on a durable cycle of growth is of course the elemental question. The answer depends on what you think caused the crisis in the first place.

If you think, as I do, that the root cause was the deformed structure of globalization over the last twenty years - a $10 trillion reserve accumulation by China and the emerging powers, with an investment bubble in manufacturing to flood saturated markets in the West, disguised for a while by debt bubbles in the Anglo-sphere and Club Med -- then little has changed.

In some respects it is now worse. China’s personal consumption has fallen to 37pc of GDP from 48pc a decade ago. The mercantilist powers (chiefly China and Germany) are still holding on to their trade surpluses through rigged currencies, the dirty dollar-peg and the dirty D-Mark peg (euro), exerting a contractionary bias on output in the deficit states - though China at least recognizes that this must change.

There is still too much world supply, and too little demand, the curse of the inter-War years. That at least is the Weltanschauung of the pessimists. If correct, we face a globalized “Lost Decade”, a string of false dawns as each recovery runs into the headwinds of scarce demand, and debt leveraging grinds on.

There are two implications to this: central banks will have to keep printing money for a long time, and the Asian surplus powers - as well as Russia and the Gulf states - will have to find somewhere to park their growing foreign reserves.

“These countries don’t want other peoples’ paper promises any longer,” said Peter Hambro, chair of the Anglo-Russian miner Petrovalovsk. “There is no sign yet that we are returning to a well-balanced and normal financial system. The ECB is accepting bus tickets as collateral and the only way out of this debt and banking crisis will be inflation in the end.”

Russia is raising the gold share of its reserves to 10pc, buying the dips with panache. China is coy, but Wikileaks cables reveal that Beijing is eyeing “large gold reserves” to back the internationalization of the renminbi.

China’s declared gold reserves of 1,054 tonnes are tiny, though it may be accumulating on the sly. Sascha Opel from Orsus Consult expects Beijing to boost its holdings by “several thousand tonnes” over the next five years to match the US stash of 8,000 and the Euro zone’s 11,000.

We do not know whether China’s central bank or wealth funds suffered a 75pc haircut on Greek bonds -- as Norway’s petroleum fund did -- but they are undoubtedly nursing large paper losses in other Club Med bonds, and the precedent for EMU sovereign default is now established. The Euro zone has become a danger zone. Rules are not upheld. Some bondholders are spared, while others are not.

Last week’s jump in Spanish bond yields to 5.61pc - from 4.9pc a month ago - should puncture the illusions of those such as France’s Nicolas Sarkozy who think the EMU crisis has been solved. The stock line in Berlin, Brussels, and Paris is that premier Mariano Rajoy has needlessly stirred up trouble by refusing to abide by Spain’s original fiscal targets, but the contraction of the Spanish economy had made the targets meaningless. To adhere to such demands would have been criminal.

As it is, Madrid is embarking on a further fiscal squeeze of 2.5pc of GDP this year, in the midst of deep recession, with unemployment already at 23.6pc and rising fast, and without offsetting monetary and exchange rate stimulus.

Yes, markets are punishing Spain, not Europe’s politicians, but that is because bond vigilantes know that the European Central Bank will be very slow to rescue an EMU “rebel” with fresh bond purchases. Agile funds do not want to be left holding Spanish debt while the country is hung out to teach it a lesson.

In the meantime, the real M1 deposits have contracted at a 10.9 annual rate over the last six months in the peripheral bloc of Italy, Spain, Portugal, Greece, Ireland, a leading indicator of trouble later this year. “The rate of contraction has accelerated, not slowed,” said Simon Ward from Henderson Global Investors.

As for the US, its economy in uncomfortably close to stall speed, and real M1 money has levelled out over the last four months. The underlying pace may not be much more than 1.5pc. The US Economic Cycle Research Institute (ECRI) is sticking to its recession call, describing the warning signals as “pronounced, persistent, and pervasive.”

We will see what happens as markets prepare for the “massive fiscal cliff” at the end of the year - as Ben Bernanke called it - when stimulus wears off and a tax rises kick in automatically, and as the delayed effect of Brent crude at $125 feeds through.

Fed hawks are making much noise, as they did in the Spring of 2008, but Goldman Sachs says they will be forced into QE3 whatever they now hope, probably in June. Hence its call that gold will rally to fresh highs of $1940 over the next year.

Interest rates are falling in real terms as inflation creeps up, and that may be the biggest single driver of gold prices. “Even without QE3, the Fed is still ultra-accommodative and they are about to reverse this,” said James Steel, HSBC’s gold guru.

Mr Steel said the “marginal cost” for mining gold is around $1450. That is when miners leave low-grade ore in the ground and weaker producers shut down. It creates a natural floor of sorts. Besides, `peak gold’ is a more immediate reality than `peak oil’, he said. There has been no equivalent to the shale revolution seen in oil and gas. World output has been stuck for a decade at around 2700 tonnes a year despite a fourfold increase in investment. There are no great finds, no Wittwatersrand this time.

There will come a day then the bullion super-cycle finally sputters out. My guess is that it will come once Europe’s monetary system has returned to a viable footing - either by real fiscal union, or by break-up - and once China’s RMB becomes fully convertible and takes it place as the third pillar of the world’s currency system. We are not there yet.

Eric King,

With many global investors still rattled by the price action of gold and silver, today King World News interviewed the “London Trader” to get his take on these markets. Here is what the source had to say: “Gold was trashed on Monday, while the Fed minutes essentially said nothing. When a central bank coordinates that kind of attack, it’s war, of course it’s war. This type of action is coordinated by Bernanke and the Fed and executed by the bullion banks. It’s actually laughable if anyone thinks that was a legitimate selloff, on what was, in reality, no news.

The London Trader continues:

“No legitimate market participants were really selling. Sure there were some stops that were taken out, but it was the bullion banks that came in with their selling and this was what suddenly created the air pockets.

There is massive sovereign physical buying going on right now. Interestingly, the sovereign buying is being swamped by paper selling. Sovereign buyers are aggressively buying tonnage every day at these levels. You have to remember their goal is to pick up physical and get rid of dollars. Nothing has changed.

Interestingly, the Asian buyers have figured out the algorithms, like breaking an enemy’s code in war, and they are using the algorithmic trading to get the best prices each day for physical gold at these levels. The trading is just taking place at lower levels because these bullion banks and the Fed, which manage the price of gold, get overzealous in their price fixing.

But there will be a huge price to pay for their activity....

“An incredible amount of physical gold has been promised for delivery and the amount of promised gold is increasing every day.

Meanwhile, back in the casino, the bullion banks don’t know whether it’s day or night. But out back there are trucks carting off some of the remaining Western gold to vaults in the East.

There is very little low hanging fruit left for the paper guys to cover into. Meanwhile, you have the sovereign buyers who are saying, ‘You know what, this elephant herd has kind of stopped now,’ and they want more physical gold at these levels.

Every day at the fix, regardless of price, sovereign entities are buying physical gold. They are averaging in at the fixes, as well as during the declines. On top of that, there are bids for hundreds of tons of physical gold starting at the $1,610 level and below. This is why the recent decline in gold halted $2 above that level.

Regardless, these physical buyers will be purchasing at the fix going forward, even if the price of gold rises. This is why the smart money, the few individuals and entities that are in the know, continue to accumulate physical gold. These well financed individuals and entities are buying because they know they will be in profit.

After ten days of the price being pummeled, after seeing these relentless sell orders come in, day after day, I can understand how smaller players can get demoralized. Many of these smaller players have been in the mining shares, and while gold has risen $1,000 to $1,500, many of the smaller companies are the same price.

It’s the same bullion banks doing this to the mining shares. The same players that are manipulating the price of gold and silver. The bullion banks are naked short these mining shares in an effort to keep the prices capped.

This is why when you look at the OTC Reports, in the latest quarterly report, there are $150 billion dollars worth of certain derivatives. These are not futures, options or even swaps. JP Morgan and HSBC control over 97% of all of the gold derivatives. When you think about it, this is a mind-blowing number.

So this is a war. This is actual warfare where the central banks and their agents are targeting sentiment. You think the Fed and the bullion banks don’t monitor King World News? Of course they do. There is a war going on here. This is a war against gold and holders of gold and the gold shares. They are being targeted.

The bullion banks are so naked short both gold and silver, and they owe so much physical metal to market participants, that this has become like hell for them. They are starting to prey on each other. We are now at the point where these bullion banks are forced to fight a day trading battle each day, sometimes against each other.

We are now to the end game. The bullion banks are so naked short gold and silver it’s unimaginable. They owe so much physical metal to market participants and more physical purchases are being scaled in every day. The sovereign buyers are taking down huge size, we’re talking serious tonnage.
The bottom line here is the leverage by the bullion banks is extraordinarily massive, and players have to remember, eventually it has to get unwound. Jim Sinclair recently stated, ‘Overvaluation in the gold market will be something to behold.’ I can promise you, his statement will be proven correct.”

Fed injections can be hard habit to kick
By Michael Mackenzie in New York

Addiction is debilitating and this week illustrates just how dependent financial markets have become on a regular infusion of easy money from the Federal Reserve.

Any habit is tough to break and for more than three years, the central bank has supplied investors and traders with near zero overnight interest rates, two rounds of “quantitative easing” or large scale bond purchases and Operation Twist, set to end in June.

So perhaps it was a genuine shock for some investors to peruse on Tuesday the minutes from March’s Fed meeting, which indicated less willingness among policy makers to pursue a third round of QE. The result was a minor tempest of selling that swept across markets led by falls in gold, US Treasury prices and equities. Other risky assets, such as corporate and mortgage bonds also weakened, sending a signal that investors remain reliant on the Fed keeping its monetary fire hose wide open.

For now investors should recognise that the prospect of QE3 remains conditional, an important tool for the Fed to implement should the global economy sag or the eurozone debt saga take a turn for the worse. It’s very much an emergency measure and should be seen as such. With official overnight rates confined near zero and the Fed conducting the Twist, whereby it buys long term Treasuries, the cost of new mortgages and car loans remains historically low.

But some investors want more and are actively positioned for greater bond purchases from the Fed in the coming months.

For example, Bill Gross at Pimco has positioned just over half his total return fund in favour of mortgages, seen as the type of bonds that the Fed will buy under QE3.

And following their bout of midweek jitters, the QE3 backers in the markets were riding again on Friday after the March jobs report revealed 120,000 new hires, well below the consensus estimate of 203,000 and the weakest monthly gain since October. Even a lower unemployment rate of 8.2 per cent, from 8.3 per cent, reflects a decline in the labour force, suggesting people are giving up looking for work.

So, after three prior months of solid job growth against the backdrop of mild winter weather that had pushed policy makers to downplay introducing QE3 when they met last month, the odds are once more tilted in favour of greater monetary largesse from the Fed. It now seems likely that policy makers will hint more openly about QE3 when they meet later this month, worried that the economy may emulate its summer slumps of the past two years.

Trades geared towards QE3 include buying gold and other dollar-denominated commodities. Greater use of the printing press by the Fed is seen fanning inflation concerns, hurting the dollar and boosting demand for gold. Higher commodity prices, however, are a cost borne by businesses and consumers and this has mitigated the economic stimulus provided by prior bouts of QE. Higher equity prices, alas, can’t offset pain at the petrol pump and the supermarket for many consumers.

All that raises the prospect that introducing QE3 simply runs the risk of entrenching the economy in its post-financial crisis mode of a stop and start recovery.

In fact, advocates of QE3 are really betting that the Fed will err far more on the side of risking much higher inflation in the long run as it seeks to lower the unemployment rate towards 7 per cent. These investors point to Fed chairman Ben Bernanke’s comments that a major mistake during the 1930s was the early tightening of policy, a decision he does not want to repeat.

All this easy money is storing up plenty of trouble down the road for the Treasury market. The manipulation of interest rates, which lowers the government’s cost of financing its debt and rewards opportunistic bond traders, has anchored the 10-year yield at just above 2 per cent. That is well below the current annualised inflation rate of 2.9 per cent, representing a loss in purchasing power for long term investors. For now, though, investors want another shot of QE to spur higher equity, bond and gold prices. More weak jobs data are likely to push the Fed down that road and intensify the market’s dependency.

HUSSMAN: There's No Jobs Recovery, Just Older Workers 'Desperate' To Grab Any Menial Job They Can
Joe Weisenthal

In his latest weekly commentary, fund manager John Hussman takes on a few ideas.

First he says that Friday's jobs report wasn't a surprise, and that April will be worse.

Then he talks about the liquidity-fueled bubble, and a market addicted to more Fed sugar.

Then he takes on the idea that there's been some fundamental improvement in the economy since the market bottom.

What looks like job growth, he says, really just reeks of desperation.

Last week, we observed "Real income declined month-over-month in the latest report, which is very much at odds with the job creation figures unless that job creation reflects extraordinarily low-paying jobs. Real disposable income growth has now dropped to just 0.3% year-over-year, which is lower than the rate that is typically observed even in recessions." It wasn't quite clear what was going on until I read a comment by David Rosenberg, who noted that much of the recent growth in payrolls has been in "55 years and over" cohort. Suddenly, 2 and 2 became 4.

If you dig into the payroll data, the picture that emerges is breathtaking. Since the recession "ended" in June 2009, total non-farm payrolls in the U.S. have grown by 1.84 million jobs. However, if we look at workers 55 years of age and over, we find that employment in that group has increased by 2.96 million jobs. In contrast, employment among workers under age 55 has actually contracted by 1.12 million jobs. Even over the past year, the vast majority of job creation has been in the 55-and-over group, while employment has been sluggish for all other workers, and has already turned down.

For most of history prior to the late-1990's, employment growth in the 55-and-over cohort was a fairly small and stable segment of total employment growth. Undoubtedly, part of the recent increase has simply been a change in the classification of existing workers as they've aged (1945 + 55 = 2000, so the we would have expected to see some gradual bulge in this bracket since 2000 due to aging baby boomers). But the shift is too large to be explained simply by reclassification. Something more troubling has been underway.

Beginning first with Alan Greenspan, and then with Ben Bernanke, the Fed has increasingly pursued policies of suppressing interest rates, even driving real interest rates to negative levels after inflation. Combine this with the bursting of two Fed-enabled (if not Fed-induced) bubbles - one in stocks and one in housing, and the over-55 cohort has suffered an assault on its financial security: a difficult trifecta that includes the loss of interest income, the loss of portfolio value, and the loss of home equity. All of these have combined to provoke a delay in retirement plans and a need for these individuals to re-enter the labor force.

In short, what we've observed in the employment figures is not recovery, but desperation. Having starved savers of interest income, and having repeatedly subjected investors to Fed-induced financial bubbles that create volatility without durable returns, the Fed has successfully provoked job growth of the obligatory, low-wage variety. Over the past year, the majority of this growth has been in the 55-and-over cohort, while growth has turned down among other workers.

Read the whole thing >

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