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Posts Tagged ‘Commodities’

Credit where credit is due

September 24, 2011 9 comments

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“When you own gold you’re fighting every central bank in the world”. Jim Rickards

To a great extend, that holds true for silver as well. This week, holders of Political Metals lost a battle, but certainly not the war. Measured against the USD, gold and silver are worth less compared to a week ago by 9.6% and 26.3% respectively.

It all started with Ben Bernanke’s statement, following the 2-day FOMC meeting, stating the obvious - that “there are significant downside risks to the economic outlook, including strains in global financial markets”. His antidote was a plan to purchase $400 billion of long-term Treasury bonds and to sell an equivalent amount of short-term debt. More commonly referred to as “Operation Twist 2″, this plan seeks to further reduce long term interest rates, after having pledged to hold short term rates practically at zero until 2013.

That announcement, made in the backdrop of the Eurozone debt crisis and news of slower growth in China, sent global stocks and commodity markets into a waterfall decline. This set up was ideal for the bullion banks who have massive gold and silver short positions. All they needed to do was to pull the trigger, and that’s exactly what they did on Thursday. Silver was pushed down sharply through its key 50 and 200 day moving averages, triggering an avalanche of tech funds selling the following day.

Going for the final kill of the week, news of yet another margin hike by CME (gold by 21%, silver by 16%) leaked into the market towards the end of Friday’s trading day. That further fuelled the selling, pushing silver briefly below $30 before closing at $31.08 - down 26.3% for the week.

In other markets this week, the Dow suffered its biggest loss since 2008. In four days U.S. stocks lost $1.1 trillion in value.  The MSCI all-country world share index (tracking thousands of stocks from developed and emerging countries) recorded its second worst quarter in 23 years and the 30-year bond rates dropped 55bps - the biggest move since the 1987 Black Monday.

So there you have it, Dr. Ben Bernanke, bullion banks & CME working together in perfect harmony. I don’t believe for a moment that the resulting market turmoil was any surprise to Bernanke. Despite saying that gold is not money, he’s smarter than most people made him out to be. After all, he achieved an SAT score of 1590 out of 1600, graduated from Harvard and has a PhD in economics from MIT. Contrary to its statutory mandate of foster maximum employment and price stability, this market turmoil I believe is a piece of precision engineering to achieve some larger agenda. This round is yours, congratulations Ben!

This engineered global markets take down could be part of the deflationary phase that Mike Maloney talked about, which is a prelude to the hyper-inflation phase. They have to assist the bullion banks cover their shorts and bring the Political Metals price down to a lower base before starting the next round of QE or equivalent. Marc Faber told ThomsonReuters that “if the S&P drops to around 900-950, we’ll get QE3 for sure”.

Four ways to view the developments over the past week

If you’re reading this blog, you’re not a professional or a day trader, possibly someone already invested in gold or silver, someone holding some Political Metals (I distinguish between investing & holding here) or someone in the process of researching the matter. As non professional traders, we have to look through and not at the turmoil unfolding before us. All of the bloody carnage above are on “paper” or bits on silicon - illusionary financial derivatives of something tangible (like gold and silver) or derivatives of something totally virtual and non-physical (like interest rates, bonds, debts, CDS, etc). Real or imaginary, they are all derivatives backed by nothing more than a promise or lies of a third party.

Unfortunately, in so far as gold & silver is concerned, the outcome of the imaginary paper price wars above gets applied to the physical world. Price discovery currently comes from the paper derivatives market. Banks and multi billion dollar hedge funds throwing thousands of futures contracts or bets at each other (most of which are done through computerised High Frequency Trading algorithms) determine the price of the coin or bar you pick up at your local bullion dealers. Until such time when this absurd situation of the tail wagging the dog changes, I suggest 4 possible ways for you to view the developments over the past week, using silver as an example.


There’s a big difference between Investing(1) & Holding(2). If you adopt approach (1), and are smart enough to handle scenario (3), congratulations! Trading this dip or swapping silver for gold just before the GSR shot over 56 would have reaped a handsome return. After years of following newsletter writers, both paid and free, I came to the conclusion that attempting to achieve (3) is at best illusionary, and at worst risky. This is particularly true in a manipulated market. Take a look at some of the forecasts by well respected industry players here. Either they missed this week’s price action or are not telling us something. Richard Russell puts it this way:

I look at gold and silver, not as a play for profits, but as an accumulation of hard assets, in a world that it drowning in fiat money, and a world that will probably print trillions more of irredeemable paper.

Finally, if you’ve been waiting patiently (4) or have spare dry powder, congratulations! While the paper price of gold & silver gets whacked, physical demand is very strong. KWN reported that Sprott Money temporarily runs out of physical silver. So, get ready to pick up your discount. Not necessarily immediately, but then again, picking the absolute bottom can also be illusionary. Best industry advise is cost averaging.

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A challenge to debate: How safe is gold? A Rebuttal

September 15, 2011 1 comment

This is my response to the article A challenge to debate: How safe is gold? by Sam Chee Kong of Malaysia Chronicle. Since links in the comments section don’t work, here’s the fully linked comment.

“But despite having one less competitor in the safe haven basket, the price of gold did not rocket up as expected. Instead it went down about $50 when the CHF news hit the streets.”

That’s because the price of gold as we know it is manipulated, although its value remains untouched. The “gold price” that the market uses is influenced largely by gold futures and options trading at the CME, which are essentially gold derivatives or “paper gold”. High Frequency Trading (HFT) by bullion banks largely determine the price of paper gold which in turn is adopted as a basis for this debate.

Because of this, gold’s price action does not make sense most of the time, and the case in point is the one you cited above. If you assume that the gold price is a reflection of the value of physical gold in a free market, your observation and conclusion is spot on. If however, you factor in the issue of manipulation, you will come to a totally opposite conclusion.  In the event cited above, gold was taken down five minutes before the announcement and the subsequent plunge of CHF. See this minute-by-minute chart of CHF and gold price actions.

If one argues that the gold price action was because of leaked news, should not the same apply for the CHF/EUR chart? To understand what happened behind the scene, listen to the comments by fund manager Ben Davis of Hinde Capital (4mins into the audio clip) and read the analysis by professional commodities trader Dan Norcini.

For in-depth discussion on manipulation of gold (& silver), visit politicalmetals.com to understand the political nature of gold and silver. Only then can you understand why gold (& silver) prices behave the way they do and why you should view them as the ultimate safe haven and store of value compared to fiat currencies or any financial instruments and paper derivatives.

I could do a point by point rebuttal of the whole article, but it’ll be quite pointless if this fundamental premise upon which the whole debate is based is not sorted out first. In the interim, just ignore the minute-by-minute, hourly, daily or even weekly price of gold. They’re all noise due to massive manipulation. To make sense of the place of gold (& silver) in the larger scheme of things, look at their prices on a monthly and yearly chart. While the powers that be are able to do massive manipulations to paint the tape on short term charts, this effect is less pronounced in long term charts.

Conclusion:

The current price discovery mechanism of gold is akin to the tail wagging the dog (paper gold influencing physical gold). Coupled with central bank manipulations, it will be a futile exercise to engage in a debate over gold’s role in one’s portfolio based on short term price actions. However, things are looking brighter going forward. With the expected opening of the Pan Asia Gold Exchange (PAGE) in China by the end of this year, Comex will no longer have the monopoly to determine the price of paper gold, and by extension, that of physical gold. When we finally see the dog wagging its tail, the proper price discovery mechanism for gold would have been in place. By then, gold’s role will be so evident this debate becomes unnecessary.

Secret Exemptions Allowed Speculators to Distort Futures Markets

August 30, 2011 2 comments

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Much has been written about how a handful of large commercial banks are suppressing the price of gold and silver though their massive short positions in the futures market. Both here and elsewhere in blogsphere, you read of frustrations being vented over the failure or refusal of the Commodities and Futures Trading Commission (CFTC) to act on these market manipulators.

Despite thousands of public comments calling for imposition of position limits following the public hearings in March 2010, nothing has been implemented to-date. It’s all quiet now, after the initial noise generated over the Dodd-Frank act. As an agency tasked with providing oversight, the CFTC appears to be closing both eyes and acting like a toothless tiger.

All these discussions, complaints and rants on the banksters and the CFTC featured here are highly focused on the gold & silver market. Readers may have the impression that it is an issue unique to this market, and some may even smell a conspiracy theory here.

I came across a recent interview by Paul Jay of the Real News Network discussing the same issues mentioned above with Michael Greenberger, professor of law at the University of Maryland - but from a different perspective. They talked about how big banks have been artificially inflating the price of food & fuel through the same manipulative mechanism in the futures market. Some key points include:

  • The CFTC assisting selected big banks and people who just want to bet, who don’t touch the underlying commodities but want to bet on price direction.
  • Stealth exemptions on position limits given to Goldman Sachs et al so that they can profitably run their “betting parlours”.
  • Futures market for food & fuel comprises 20% real hedgers (for whom the futures market was originally designed) and 80% commercial speculators who have nothing to do with the physical commodities.

Sounds familiar? This video should help cast away any doubt that allegations of gold & silver price manipulation by the banksters, assisted by the CFTC, are for real. We’re not the only ones affected. The whole commodities market is similarly tainted - by the same culprits.

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Gold Bullion up 5% for Week, “”Physical, Allocated Gold Preferred”, Short Sell Ban “Is Worst Thing They Can Do”

August 13, 2011 3 comments

Submitted by Ben Traynor | BullionVault, 12 Aug ’11

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Gold Bullion prices dropped nearly 1% in an hour Friday morning in London – hitting a low of $1746 per ounce – as stocks and commodities rallied after yesterday’s decision by four European regulators to ban short selling.

Dollar Gold Bullion Prices however remained 5% up for the week as we head towards the weekend.

Silver Bullion Prices meantime hit $38.70 per ounce around lunchtime – a 1% gain for the week.

“The gold physical market seems to believe that gold will move still higher soon,” reckons Walter de Wet, commodities strategist at Standard Bank.

“This, combined with seasonal demand which should start picking up soon too, is providing good physical demand for gold and silver.”

“The gold market remains underpinned by the movement to physical gold,” agrees a note from UBS.

“We have also observed among existing and indeed new clients this week a growing preference towards Allocated Gold instead of metal account/unallocated gold…the move to real assets such as gold in physical form signifies the heightened state of risk aversion at present.”

Regulators in France, Italy, Spain and Belgium moved to ban short selling of financial stocks on Thursday – after another day of volatile trading in the shares of French banks.  The ban will be in effect for 15 days.

Short sellers “wanted to test French resistance,” said Jean-Pierre Jouyet, head of the Autorité des Marchés Financiers, the French regulator.

“This is our response, as always very determined, and it will be so for all those who want to put us to the test.”

“It is the worst thing to do right now,” says Abraham Lioui, economics professor at France’s Edhec business school.

“This would signal to the market there may be something fundamentally bad that is happening.”

“In the short-term it will help calm things down,” adds Ion-Marc Valahu, fund manager at ClairInvest in Geneva.

“But if you look at what happened at Lehman during the crisis, it didn’t do much.”

The Dutch financial regulator said Friday it did not see any need for a ban.

France’s economy failed to grow at all in second quarter of the year, according to figures published Thursday – which showed French GDP growth of 0% compared to the first three months of the year.

Friday meantime brought news that Eurozone-wide industrial production slowed in June. Year-on-year growth dropped to 2.9% - down from 4.4% the previous month.

Over in the US, SPDR Gold Trust (ticker: GLD), the world’s largest Gold ETF, saw its biggest one day outflow of Gold Bullion since January on Thursday, as investors withdrew the equivalent of 23.6 tonnes.

“Some ETF investors clearly view the recent…sharp price rally as exaggerated and have taken profits, as financial markets calm,” says a note from Commerzbank.

Over in Vietnam, the governor of the central bank has suggested the Vietnamese government may seek to control the domestic Gold Price.

His comments come after the Vietnamese Dong fell 1% against the Dollar this week to VND20,812 per $1 – the biggest fall since February.

“Companies need Dollars to import gold,” explains Luu Hai Yen, fixed-income analyst at Thang Long Securities in Hanoi.

“Demand for Dollars is expected to rise from now to the end of the year.”

Vietnam is pursuing “muddled objectives” says Dr. Vuong Quan Hoan, founder of Hanoi-based consultancy DHVP Research.

“This added target… would likely further complicate the already clumsy monetary policy in the country amid increasing pressure caused by macro imbalances.”

Earlier in the week the State Bank of Vietnam – which controls the import and export of gold – allowed dealers to import 5 tonnes of Gold Bullion to ease domestic Gold Prices, which had opened up a premium against those quoted on the international spot market.

Get the safest Allocated Gold at the lowest prices with BullionVault



Ben Traynor is editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault. Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

Gold, Medicare and Foreigners’ Money

August 4, 2011 Leave a comment

Submitted by Ben Traynor03 Aug ’11

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How foreigners have paid for US entitlement spending…

I was the one who let you know
I was your sorry ever after
’74-’75

MAYBE it’s coincidence, or maybe The Connells were onto something, but the years 1974 and 1975 stand out as key dates in the economic history of the United States, writes Ben Traynor at BullionVault.

December 31 1974 was the date Americans finally regained the right to own gold. The US removed the last of its significant capital controls in 1974, while 1975 was the time it ever ran a trade surplus.

That’s not all. According to data from the US Treasury and the Bureau of Economic Analysis, 1974 was the year US national debt stopped falling as a percentage of economic output. For the rest of the 1970s, national debt held constant at around a third of gross domestic product, before beginning the long climb that would lead to the debt ceiling theatrics we’ve seen in Washington over recent weeks.

To understand why this was, we need to go back to August 15 1971 – the day Richard Nixon cut the Dollar’s convertibility to gold. Take a look at what has happened since to the US federal deficit:

The chart shows the federal deficit, measured quarterly, as a percentage of GDP going back to 1947. For much of the postwar era, the US government was actually in surplus – shown on the chart as a negative deficit.

Not only that, for the period 1950 to 1974 the average deficit was just 0.7%, according to research by Kevin Kliesen and Daniel Thornton, economists at the Federal Reserve Bank of St Louis.

The period since 1974, however, looks very different. There was only one, short-lived surplus period towards the end of the last century, mostly the result of falling defense spending following the end of the Cold War. The rest of the period saw government borrowing – with the average deficit coming in at 3.1% of GDP.

Something had clearly changed. Kliesen and Thornton put the blame squarely on increased spending. Tax revenues, they argue, have remained at around 18% of GDP for at least 60 years. Government spending, however, has crept up.

In a follow-up essay, the two St Louis Fed economists argue that Social Security, Medicare and “other payments to individuals” account for much of this increase. Because these rising payments were not matched by rising revenues, or by spending cuts elsewhere, they inevitably led to the persistent budgets deficits that have seen US national debt grow to $14.3 trillion – a figure we are now very familiar with thanks to the debt ceiling “debate”.

But what’s the connection with gold? How did Nixon’s action forty years ago pave the way for a growth in entitlement spending beyond what GDP growth would have justified?

The answer is that – thanks to Nixon’s maneuver – foreign money could fill the gap.

The ‘Impossible Trinity’ of exchange rate economics states that a country can only achieve two of the following three goals at any one time: a fixed exchange rate, an independent monetary policy and a free flow of capital across its borders. Any attempt to achieve all three simultaneously is doomed to failure.

As an example, suppose a country wants to lower its interest rates in an attempt to boost domestic growth. This is liable to cause outflows of funds abroad seeking a better return elsewhere, putting downwards pressure on the exchange rate, and threatening the currency’s peg in a fixed exchange rate system.

To maintain the peg, the country may try to support its currency on the open market. But it can’t do this forever – it will run out of foreign exchange reserves. Its only options are to raise interest rates or abandon free capital flows by imposing controls. In a fixed exchange rate system it cannot maintain monetary sovereignty without capital controls.

By cutting the Dollar’s peg with gold, Nixon also cut its peg to every other major currency, giving birth to the free floating era we have today. As a result, the US could abandon its capital controls without giving up control over interest rates.

It did just that. The result was an explosion in foreign holdings of US financial assets – with US Treasury debt a major destination for foreign funds:

  • In 1974, foreign investors held $23.8 billion in long-term US debt – equivalent to 1.6% of GDP
  • By 1989 that figure had risen to $333.2 billion (6.0% of GDP)
  • By 1997 it was $1.05 trillion (12.6% of GDP)
  • By June 2010a total of $3.3 trillion of long-term US debt was foreign held – 23% of GDP.

The implication is clear – foreigners bankrolled the expansion of Medicare. Foreigners paid for the growth in Social Security. The question is…why?

The answer, of course, is they didn’t have much choice. The US Dollar, as we know, is the world’s number one reserve currency. So the rest of the world has to keep a healthy stash of Dollars as a prerequisite to doing business.

Not only that, with the US running a constant trade deficit other countries have been raking in US currency. They have to put it somewhere – and the US debt markets are the deepest and most liquid on the planet.

Severing the link between the Dollar and gold, then, not only led to an external trade deficit. It also allowed Uncle Sam to run a persistent – and larger – internal deficit, funded from beyond America’s borders.

The question haunting the US Treasury is: how much longer will the world’s surplus nations keep bailing it out?

Get the safest gold at the lowest prices with BullionVault…


Ben Traynor is editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault. Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
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