Monthly Archives: February 2014

Always a Great Watch, Chris Martenson Explaining Our Present Situation….Courtesy of RT Boom Bust

Our lead story: JP Morgan Chase, the largest bank in the US by assets is reducing its headcount for 2014. The bank announced the changes, saying that creating a business model that can deal with new regulation is cutting into the firm’s profits. JP Morgan said it expects its total headcount to fall by 5,000 to 260,000 people. But JP Morgan is confident that it can win in this new environment… by replacing humans with machines. Erin explains.

Then we welcome Chris Martenson of Peakprosperity.com to give his thoughts on the Federal Reserve and the weak fundamentals of the US economy. In the first segment, Martenson discusses the effect of the huge flood of liquidity created by the Fed on the market. He also explains why bond prices can go up as a result of the Fed’s quantitative easing. After the break, Martenson describes why quantitative easing has helped equity prices but hasn’t helped the underlying economy. He also talks about what is happening with inflation in the economy.

For today’s Big Deal, Erin chats with Ed Harrison about Mt. Gox and the future of Bitcoin. On Monday Mt. Gox abruptly stopped trading and shut down its website. An unconfirmed document circulating the internet suggests that Mt. Gox has lost upwards of 744,000 Bitcoins as a result of theft. Erin asks what happened and if Bitcoin will survive.

 

 

Huge Gold Opportunity …. by Erik Sprott

Don’t Miss this Golden Opportunity!

By: Eric Sprott, Original article see here…

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period.1 This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR.2 What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.

The chronology goes as follows:

  • November 27, 2013, BaFin announces an inquiry into precious metals manipulation on the London Bullion Market Association (LBMA).3
  • Mid-December 2013, BaFin is reported to have seized documents from Deutsche Bank (DB).4
  • January 17, 2014, BaFin announces that the manipulation is “worse” than LIBOR.1 On the same day, DB also announces its withdrawal from the LBMA gold and silver price fixings.5

Let’s imagine how this played out. Our guess is that BaFin, having reviewed DB’s trading practices, reported their findings to DB’s senior management. They are horrified at the findings (cough, cough) and decide a retreat from LBMA is required. This seems logical to us.

Let’s now discuss why bank traders get involved in price manipulation. In the most simple of all analyses, they don’t do it for the bank, but they do it to fraudulently receive higher bonuses. Otherwise, why take such personal risk? If we assume that manipulation of precious metal prices was the reality, as a bonus seeking trader, when do you want the price to be the most favorable? The answer is simple: by year-end and mid-year periods, when bonuses are calculated.

Figure 1: Gold Price Bottoms at Mid-Year and Year-End
maag-02-2014-fig1.gif
Source: Bloomberg, Sprott Asset Management LP

If we look at what happened in 2013, the two lowest gold prices were on June 27th and December 19th (Figure 1).

Perfect! And perfectly obvious…

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply (Figure 2. See Markets at a Glance January 2014, October 2013, July 2013, May 2013 and February 2013 for more information on the shortage of physical gold).

Figure 2: World Gold Supply and Demand 2013, in Tonnes6
maag-02-2014-fig2.gif

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 3).

Figure 3: Gold Price is far from its Long-Term Linear Trend
maag-02-2014-fig3.gif
Source: Bloomberg and Sprott Estimates

Figure 4 shows estimates of cash flow per share (CFPS) for different sized gold miners under gold prices at both $1,300 and a $2,000 per ounce. As you will note, the potential returns vary from 180% for the lumbering seniors to 420% for some of the smaller producers.

Figure 4: Upside Scenarios For Different Types of Gold Miners
maag-02-2014-fig4.gif
Assumed Cash Flow multiple: 10. All Figures in US dollars. Estimates are for FY2014.
Source: Sprott Estimates and RBC Capital Markets. For illustrative purposes only. Eric Sprott and/or Sprott Asset Management Funds beneficially (directly or indirectly) may own in excess of 1% of one or more classes of the issued and outstanding securities of the above issuer).

Are these gains likely to materialize? So far in 2014, the senior miners are up 27%1, while the junior miners are up 42%7. Not a bad year. But, we are only seven weeks into the year.

Gold and silver have broken their downtrends and have surpassed their 200 day moving averages. The golden cross (i.e. the fifty day rising through the 200 day) still awaits, but it is most likely to happen within weeks.

When was the last time that an obvious reversal of an anomalous, yet explicable market dysfunction allowed you to imagine that you could expect multi-hundred per cent returns over a short time period?

Again, don’t miss this Golden Opportunity!

The Coming Silver Storm : Public Are Not Prepared……by SRSrocco

THE COMING SILVER STORM: The Public Is Not Prepared

Filed in EnergyPrecious Metals by  on February 17, 2014

The financial sky is growing dark.  The stock markets are experiencing volatile trade winds.  The barometer of the economy grows weak as indicators point to another recession looming on the horizon.

The Precious Metal Storm is coming… unfortunately, the public is not prepared.

I believe the U.S. and world are heading toward an economic collapse that civilization has never witnessed before.  Even though we have suffered greatly through World Wars and global depressions, we have always been able to pull ourselves out of the chaos and destruction by regrouping and rebuilding.

As I have stated several times before… this time will be different.

After reading the work of various precious metal and energy analysts, I am quite surprised how many of these individuals can posses a high degree of intelligence while making some seriously flawed forecasts and assumptions.

One of my readers asked me a question via an email, “How could I provide a lot of quality analysis and data… while being BULLISH ON SILVER?”  This person couldn’t understand why I could be fundamentally in favor of silver when typical orthodox analysis points to a bearish deflationary outcome for the shiny metal.

And… there lies the rub.

The U.S. and world are heading down the toilet because analysts, intellectuals and the movers & shakers running the show, have allowed their ignorance-greed rather than their intelligence-wisdom to guide monetary, economic and governmental policy.

FIAT CURRENCY ASSETS:  The Great Bamboozle

The chart below shows where the majority of U.S. personal sector monetary cash assets are allocated.  These do not include retirement or security investments, but are rather paper assets we may label as “Cash or Cash Equivalents.”

U.S. Personal Sector Financial Assets & Total Global Silver ETF's

According to the Federal Reserve Q3 2013 Statistical Release, the U.S. public held $1,174 billion in Money Market Fund Shares, $1,332 billion in Checkable Deposits & Currency and $7,723 billion in Time & Saving Deposits.  Thus, there is a total of $10,229 billion or $10.2 trillion in these paper cash assets.

You will notice on the left side of the graph a small pathetic figure of $14 billion.  This represents the total value of all the Global Silver ETF’s as of Q3 2013.  The data for that figure comes from GFMS Thomson Reuters Nov. 2013 Silver Update.

The next chart below details the holdings of the different Silver ETF’s from around the world:

Current Value of SIlver ETFs

As we can see there are 655 million oz of silver held in these Silver ETF’s. If we multiply the 655 million oz by $21, we would get a figure of $13.7 billion.  I rounded the figure to $14 billion in the first chart.

If we assume that this is the largest store of physical silver in the world (not including the LBMA or COMEX), its total value ($13.7 billion) pales in comparison to $10.2 trillion held in U.S. personal cash assets.

Now, if we were to include the current 182 million oz of silver at the Comex and let’s say there is another 200 million oz at the LBMA, that would add another $8 billion to the figure… giving us a total of $22 billion.

Whoopee…

The U.S. public has $7.7 trillion stashed away in digital Time & Savings Deposits.  I am going to disregard the other two categories as they are fiat currency assets that the public may use on a more “day-to-day” basis.

However, Time & Savings Deposits are “extra or surplus”  funds that are generally not used in the day-to-day business of Americans.  Thus, the total value of the Global Silver ETF’s are 0.2% (one fifth of one percent) of the value of all U.S. Time & Savings Deposits.

This may not seem so strange to the typical American today, but just fifty years ago (when I was a kid), the U.S. Dollar was backed by gold and the coinage had a great deal of silver in it.

After President Lyndon Johnson signed the “Coinage Act of 1965″, which removed silver from circulation, within a few years… it was difficult to find a silver coin.  Once silver was removed from official U.S. coinage, it went into hiding.

The term “went into hiding” means the public instinctively understands the implications of Gresham’s Law — bad money drives out the good.  When the U.S. Government starting minting base metal slugs as official money, it didn’t take long for the public to withdraw the real money (silver) from circulation.

A few years after the signing of 1965 Coinage Act (removing silver from circulation), the next shoe to drop was gold.  On August 15, 1971, Nixon closed the gold window, which meant foreign governments could no longer exchange U.S. Dollars for physical gold.

Because the U.S. was printing so much money in the 1960′s to cover the costs of social programs and the war in Viet Nam, foreign countries were exchanging paper Dollars for physical gold.  During the 1960-1968 time period, the U.S. was apart of the London Gold Pool that attempted to hold the price of gold at $35 by selling thousands of tons of gold on the market.

The biggest loser in the London Gold Pool was the U.S. as it exported over 4,700 metric tons during that nine-year time period.  Here again was another example of bad money driving out good.

If we fast forward to today, Gresham’s Law is alive and well as the East continues to exchange worthless fiat Dollars for physical gold.  Not only did the Chinese import a record amount of gold in 2013, they also imported a stunning 247 metric tons in January.

According to Koos Jansen from the “In Gold We Trust” website:

Having said that; How can gold demand (I assume that’s what they mean by usage) be 1176 tons, when China mainland net imported 1123 tons just from Hong Kong, domestically mined 428 tons, and additionally net imported gold through other ports? Regular readers of this blog know the number 1176 tons of demand is false, it was in fact 2197 tons as my research has exposed.

….Withdrawals from the Shanghai Gold Exchange vaults in January 2014 accounted for 247 tons, which is an increase of 43 % compared to January 2013. It’s also more than monthly global mining production and an all-time record! China mainland mines about 35 tons per month which is required to be sold first through the SGE. The other 212 tons (247 – 35) had to supplied by import or recycled gold. My estimate is that scrap couldn’t have been more than 25 tons, so import in January was a staggering 187 tons. China is still draining the vaults in the west BIG TIME.

Currently, China and many other Eastern countries are focusing on acquiring physical gold… as it is the king of monetary metals.  However, this does not mean that silver will miss the huge transfer of wealth show because it is now just a supposed “Industrial Metal.”

Silver is still a valued monetary metal due to the fact that the Official Mints continue to produce both Gold & Silver Eagles, Maples, Philharmonics, Koalas, Kangaroos, Pandas and Libertads.  Do you see these Official mints producing these coins in copper??

Regardless, demand for silver is picking up as both India and China have increased their net imports of silver over the past several years.  This chart is from Nick Laird’s Chartsrus.com:

Chinese Net Silver Imports From Hong Kong

Here we can see that China has gone from being a big net exporter of silver, to a net importer since 2010.  In 2009, (last year being a net exporter), China had net exports of 1,260 metric tons.  However, in 2012, China became a net importer of 82 metric tons.

While this may seem like an insignificant figure presently, it is the beginning of another trend change that will more than likely continue to a greater degree in the future.

Furthermore, when the Indian Government cracked down on gold imports in 2013, its citizens switched to buying silver.  Indians imported a record 5,400 metric tons of silver in 2013:

Indian Silver Imports 2007 - 2013

This was a record amount of silver imported by India, estimated to surpass the 5,049 metric tons set in 2008.  This provides proof that citizens of the world will instinctively purchase silver if they cannot acquire gold.  When one monetary metal is unavailable, demand for the other will increase.

Did the Indians LOAD UP ON COPPER when they couldn’t buy gold?  Of course not.  Maybe at some point, the public will realize the monetary value of silver.

Unfortunately, the realization will be too late as available supplies of physical silver will dry up and blow away when the GREAT FIAT CURRENCY RESET finally arrives.

If we consider that the U.S. public holds $7.7 trillion in Time & Savings Deposits while the world has a paltry $13.7 billion in total Global Silver ETF’s, something is very wrong with the public’s ability to understand the wisdom of “real value.”

Again, less than fifty years ago, gold and silver were legal forms of money in the United States.  Today, if you talk about the positive attributes of gold and silver on CNBC, you become the laughing-stock on the set.

Gold and silver will become some of the best stores of value in the future as Peak Energy destroys the ability for the Global Fiat Monetary system to continue.

We must remember the KEY INGREDIENT that keeps a Ponzi Scheme alive is the ability to hoodwink a new batch of POOR UNWORTHY SLOBS to part with their hard-earned fiat currency.  When I say SLOBS, I am not trying to be harsh here (as I am one of the SLOBS myself), but rather to offer a term that the banking elite would use in describing their clients — the public.

If a typical Ponzi Scheme needs a new supply of victims’ funds to keep it going, the Global Fiat Monetary Ponzi needs a growing supply of energy to keep it from collapsing.  That is why a peaking global oilsSupply will destroy the ability for the Elite to continue manipulating the system.

The Fiat Monetary System and Derivative’s Monster is heading towards certain death…. it’s just a matter of time.

Please check back at the SRSrocco Report as I will be providing a new REPORTS PAGE including my first paid report, THE U.S. & GLOBAL COLLAPSE REPORT.  You can also follow us at Twitter at the link below:

“Money Launderer Until Proven Innocent” – Italy Imposes 20% Withholding Tax On all Inbound Money Transfers ……Courtesy of Zerohedge

holdup“Money Launderer Until Proven Innocent” – Italy Imposes 20% Tax Withholding On All Inbound Money Transfers

While the propaganda surrounding Europe’s “recovery” has reached deafening levels, what is going on behind the scenes is quite the opposite, and in the latest example that Europe is increasingly formalizing a regime of implicit capital controls, we learn that Italy has just ordered banks to withhold a 20% tax on all inbound wire transfers: a decree which on to of everything will apply retroactively to February 1. As Il Sole reports, “the deductions will be automatic (unless prior request for exclusion), and then it will be up to the taxpayer to prove that the money is not in the nature of compensation “income.” In other words, as of this moment, but really starting two weeks ago, all Italians are money launderers unless proven innocent.

Some more details on Italy’s latest decision to limit capital flows into the country, Google translated:

… the collection is the result of the decision to consider any transfer from abroad and directed to an individual Italian, as a component of taxable income, subject to proof to the contrary, which must be date the taxpayer receives the sum on your account. However, the first payments to the Treasury by intermediaries (mainly banks) will be performed July 16, so that the deemed payment accrued from February 1 until June 30 (and therefore set aside and with interest). Next, you will pay the withholding every 16th of the month following the effective perception of the sum. In fact, all taxpayers who receive a transfer from abroad on their personal account – and not professional or business – will be applied to the deduction, as an advance which will then be computed in the annual tax return.

What Italy appears to be focusing on are direct income payments where individuals get compensation via bank transfer. Of course, since the tax is superceding, good luck to any Italian citizen explaining the origin of every inbound money transfer and it is in accordance with the law. `

It is, therefore, a real “held” that will not be applied only in the case where the taxpayer proves that the amount received or quenched and does not have a connotation income but only and exclusively sheet: for example, the transfer incoming could be a return of a loan made in the past, or the return of a deposit, the date for the conduct of a house leased abroad.

Reasoning aside, what Italy just did is enforce a “shotgun” withholding tax on all inbound money:

The mechanism that provides a primary role to the bank official that is to receive the declaration of the taxpayer and evaluate it. In any case, you make the deduction or not, the name of the recipient will be reported by the bank Revenue Agency. And the taxpayer has until February 28 of the year following the year of the deduction to attest to the improper application of withholding tax to the bank and ask for a refund.

Even Il Sole admits that the new tax is so ad hoc that confusion will surely follow:

As is apparent from the wording of the measure, there is not even a standard for the development of self but, certainly, there will be a “balancing” between assets and funds held abroad (the RW of the UNICO) and income flows in entry: in short, it is likely that the intermediary in addition to the self-certification may require a taxable person to the performance of the RW framework from which we must infer what good has originated the incoming cash flow.

Of course, what will end up happening, is that more Italians- especially the wealthiest ones – will open bank accounts either in other Eurozone nations that have not established such a draconian wire transfer regime, or – more realistically – in such New Normal tax havens as Singapore now that Switzerland’s main business model for centuries has been destroyed. The end result will be even less capital inflows into Italy – just the opposite of what the desperate Italian government is trying to achieve. But that is a concern for the next Italian government and the one promptly replacing it. For the time being, let’s all pretend Europe is fixed, even as it prepares for the nuclear option: the confiscation of retirement savings.

20 Signs That The Global Economic Crisis Is Starting To Catch Fire…..Courtesy of The Economic Collapse

Original posted article here

20 Signs That The Global Economic Crisis Is Starting To Catch Fire

 By Michael Snyder, on February 13th, 2014

Lighting A Match - Photo by Sebastian RitterIf you have been waiting for the “global economic crisis” to begin, just open up your eyes and look around.  I know that most Americans tend to ignore what happens in the rest of the world because they consider it to be “irrelevant” to their daily lives, but the truth is that the massive economic problems that are currently sweeping across Europe, Asia and South America are going to be affecting all of us here in the U.S. very soon.  Sadly, most of the big news organizations in this country seem to be more concerned aboutthe fate of Justin Bieber’s wax statue in Times Square than about the horrible financial nightmare that is gripping emerging markets all over the planet.  After a brief period of relative calm, we are beginning to see signs of global financial instability that are unlike anything that we have witnessed since the financial crisis of 2008.  As you will see below, the problems are not just isolated to a few countries.  This is truly a global phenomenon.

Over the past few years, the Federal Reserve and other global central banks have inflated an unprecedented financial bubble with their reckless money printing.  Much of this “hot money” poured into emerging markets all over the world.  But now that the Federal Reserve has begun “tapering” quantitative easing, investors are taking this as a sign that the party is ending.  Money is being pulled out of emerging markets all over the globe at a staggering pace and this is creating a tremendous amount of financial instability.  In addition, the economic problems that have been steadily growing over the past few years in established economies throughout Europe and Asia just continue to escalate.  The following are 20 signs that the global economic crisis is starting to catch fire…

#1 The unemployment rate in Greece has hit a brand new record high of 28 percent.

#2 The youth unemployment rate in Greece has hit a brand new record high of 64.1 percent.

#3 The percentage of bad loans in Italy is at an all-time record high.

#4 Italian industrial output declined again in December, and the Italian government is on the verge of collapse.

#5 The number of jobseekers in France has risen for 30 of the last 32 months, and at this point it has climbed to a new all-time record high.

#6 The total number of business failures in France in 2013 was even higher than in any year during the last financial crisis.

#7 It is being projected that housing prices in Spain will fall another 10 to 15 percent as their economic depression deepens.

#8 The economic and political turmoil in Turkey is spinning out of control.  The government has resorted to blasting protesters with pepper spray and water cannons in a desperate attempt to restore order.

#9 It is being estimated that the inflation rate in Argentina is now over 40 percent, and the peso is absolutely collapsing.

#10 Gangs of armed bandits are roaming the streets in Venezuelaas the economic chaos in that troubled nation continues to escalate.

#11 China appears to be very serious about deleveraging.  The deflationary effects of this are going to be felt all over the planet. The following is an excerpt from Ambrose Evans-Pritchard’s recent article entitled “World asleep as China tightens deflationary vice“…

China’s Xi Jinping has cast the die. After weighing up the unappetising choice before him for a year, he has picked the lesser of two poisons.

The balance of evidence is that most powerful Chinese leader since Mao Zedong aims to prick China’s $24 trillion credit bubble early in his 10-year term, rather than putting off the day of reckoning for yet another cycle.

This may be well-advised for China, but the rest of the world seems remarkably nonchalant over the implications.

#12 There was a significant debt default by a coal company in Chinalast Friday

A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday, in the latest sign of financial stress in China’s shadow bank sector.

#13 Japan’s Nikkei stock index has already fallen by 14 percent so far in 2014.  That is a massive decline in just a month and a half.

#14 Ukraine continues to fall apart financially

The worsening political and economic circumstances in Ukraine has prompted the Fitch Ratings agency to downgrade Ukrainian debt from B to a pre–default level CCC. This is lower than Greece, and Fitch warns of future financial instability.

#15 The unemployment rate in Australia has risen to the highest levelin more than 10 years.

#16 The central bank of India is in a panic over the way that Federal Reserve tapering is effecting their financial system.

#17 The effects of Federal Reserve tapering are also being felt in Thailand

In the wake of the US Federal Reserve tapering, emerging economies with deteriorating macroeconomic figures or visible political instability are being punished by skittish markets. Thailand is drifting towards both these tendencies.

#18 One of Ghana’s most prominent economists says that the economy of Ghana will crash by June if something dramatic is not done.

#19 Yet another banker has mysteriously died during the prime years of his life.  That makes five ”suspicious banker deaths” in just the past two weeks alone.

#20 The behavior of the U.S. stock market continues to parallel the behavior of the U.S. stock market in 1929.

Yes, things don’t look good right now, but it is important to keep in mind that this is just the beginning.

This is just the leading edge of the next great financial storm.

The next two years (2014 and 2015) are going to represent a major “turning point” for the global economy.  By the end of 2015, things are going to look far different than they do today.

None of the problems that caused the last financial crisis have been fixed.  Global debt levels have grown by 30 percent since the last financial crisis, and the too big to fail banks in the United States are 37 percent larger than they were back then and their behavior has becomeeven more reckless than before.

As a result, we are going to get to go through another “2008-style crisis”, but I believe that this next wave is going to be even worse than the previous one.

So hold on tight and get ready.  We are going to be in for quite a bumpy ride.

China’s 2013 Gold Demand Surpasses 2,716 Tons……by Alasdair Macleod

Red Dragon

Original article by Alasdair see here

The China Gold Association this week released estimates for China’s “gold consumption” for 2013 at 1,176 tonnes. Furthermore the CGA reported China’s own gold production at 428 tonnes.

The CGA’s figures were significantly less than recorded imports into China from Hong Kong. Instead, on my analysis, the CGA figures do not represent total demand, but presumably only that portion reported to it by its members at the retail level. The purpose of this article is to set the record straight.

There are very few figures coming out of China that you can rely upon, and this is particularly true of gold imports. Instead, you have to take what is available and apply a judicious mix of logic and deduction. Mainland China does not publish imports and exports. The only figures for gold supplied to the Chinese public are of gold delivered through the Shanghai Gold Exchange and out of their registered vaults, which for 2013 totalled 2,197 tonnes. Most of this I have reason to believe is imported, only some of which is through Hong Kong. And to think that gold is only imported through Hong Kong is a mistake.

Hong Kong releases import, export and re-export statistics monthly. Exports are goods and raw materials processed locally, and re-exports are imported materials and goods subsequently exported unaltered, such as gold bars to SGE specifications.

The table below shows my calculations for total Chinese and Hong Kong demand.

Identifiable gold demand for China and Hong Kong - 2013

All gold that changes hands in China is meant to go through the SGE. However, mine output is thought to be bought up by the government, most probably directly from the mines bypassing the SGE. All circumstantial evidence including government policy towards physical gold tells us this is true. And it is naïve to think a communist government – any government for that matter – would route gold from mines it controls through the market, whatever the market “rules” are.

The SGE has a network of registered vaults. The definition of deliveries applies to gold withdrawn from the vaulting system, which is why deliveries equate to public demand. This is not to be confused with gold delivered between SGE member firms and kept within the vaulting system.

Bars withdrawn from SGE-registered vaults and subsequently sold back into the market are recast into new bars and are classed as scrap. At current prices, this supply is likely to have diminished from over four hundred tonnes annually to perhaps two or three hundred tonnes in 2013.

So of the 2,197 tonne total, assuming all mine supply bypasses the market into government hands and scrap is a few hundred tonnes, we can conclude that roughly 2,000 tonnes is imported into China’s Mainland, only some of which comes from Hong Kong.

 

Hong Kong

Hong Kong’s exports of 211 tonnes to China are fabricated gold not destined for the SGE (see the table above). In addition there are 1,284 tonnes of re-exports, which we can assume are bars for onward delivery to the SGE so are included in the SGE delivery total. Hong Kong also imports gold from China (337 tonnes), most of which is sold as jewellery to Chinese visitors from the mainland avoiding Chinese sales taxes. Hong Kong also acts as a regional hub, exporting and re-exporting gold to Taiwan, Thailand, India etc., which in 2013 amounted to 54 and 93 tonnes respectively.

Total demand in China and Hong Kong adjusted for these factors is therefore the bottom-line figure of 2,668 tonnes. This does not include gold imported directly through Mainland China and gold not sold through the SGE. Furthermore, ultra-rich Chinese can buy gold outside China and there is no way this additional demand can be estimated. Nor can we estimate any gold bought in London and elsewhere by the Chinese government.

Lastly, these figures do not include the net 48.5 tonnes of gold coin imported into China via Hong Kong, which if included takes known gold demand up to 2,716.5 tonnes. This is easily more than double the Chinese Gold Association figure for “gold consumption”.

While we cannot pin down gold imports precisely, the monopoly market for physical gold in China allows us to accurately define public demand on the mainland. Together with Hong Kong trade figures we get a far more accurate picture than that given by any other means. It should be noted that even this approach misses the activities of the government itself and of the very rich able to bypass the system.

It is a pity this is not more widely appreciated by analysts in Western capital markets.

Europe Considers Wholesale Savings Confiscation, Enforced Redistribution……Courtesy of Zerohedge

holdup

 

See Original Article here.

 

At first we thought Reuters had been punk’d in its article titled “EU executive sees personal savings used to plug long-term financing gap” which disclosed the latest leaked proposal by the European Commission, but after several hours without a retraction, we realized that the story is sadly true. Sadly, because everything that we warned about in “There May Be Only Painful Ways Out Of The Crisis” back in September of 2011, and everything that the depositors and citizens of Cyprus had to live through, seems on the verge of going continental. In a nutshell, and in Reuters’ own words, “the savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis, an EU document says.” What is left unsaid is that the “usage” will be on a purely involuntary basis, at the discretion of the “union”, and can thus best be described as confiscation.

The source of this stunner is a document seen be Reuters, which describes how the EU is looking for ways to “wean” the 28-country bloc from its heavy reliance on bank financing and find other means of funding small companies, infrastructure projects and other investment. So as Europe finally admits that the ECB has failed to unclog its broken monetary pipelines for the past five years – something we highlight every month (most recently in No Waking From Draghi’s Monetary Nightmare: Eurozone Credit Creation Tumbles To New All Time Low), the commissions report finally admits that “the economic and financial crisis has impaired the ability of the financial sector to channel funds to the real economy, in particular long-term investment.”

The solution? “The Commission will ask the bloc’s insurance watchdog in the second half of this year for advice on a possible draft law “to mobilize more personal pension savings for long-term financing”, the document said.”

Mobilize, once again, is a more palatable word than, say, confiscate.

And yet this is precisely what Europe is contemplating:

Banks have complained they are hindered from lending to the economy by post-crisis rules forcing them to hold much larger safety cushions of capital and liquidity.

 

The document said the “appropriateness” of the EU capital and liquidity rules for long-term financing will be reviewed over the next two years, a process likely to be scrutinized in the United States and elsewhere to head off any risk of EU banks gaining an unfair advantage.

But wait: there’s more!

Inspired by the recently introduced “no risk, guaranteed return” collectivized savings instrument in the US better known as MyRA, Europe will also complete a study by the end of this year on the feasibility of introducing an EU savings account, open to individuals whose funds could be pooled and invested in small companies.

Because when corporations refuse to invest money in Capex, who will invest? Why you, dear Europeans. Whether you like it or not.

But wait, there is still more!

Additionally, Europe is seeking to restore the primary reason why Europe’s banks are as insolvent as they are: securitizations, which the persuasive salesmen and sexy saleswomen of Goldman et al sold to idiot European bankers, who in turn invested the money or widows and orphans only to see all of it disappear.

It is also seeking to revive the securitization market, which pools loans like mortgages into bonds that banks can sell to raise funding for themselves or companies. The market was tarnished by the financial crisis when bonds linked to U.S. home loans began defaulting in 2007, sparking the broader global markets meltdown over the ensuing two years.

 

The document says the Commission will “take into account possible future increases in the liquidity of a number of securitization products” when it comes to finalizing a new rule on what assets banks can place in their new liquidity buffers. This signals a possible loosening of the definition of eligible assets from the bloc’s banking watchdog.

Because there is nothing quite like securitizing feta cheese-backed securities and selling it to a whole new batch of widows and orphans.

And topping it all off is a proposal to address a global change in accounting principles that will make sure that an accurate representation of any bank’s balance sheet becomes a distant memory:

More controversially, the Commission will consider whether the use of fair value or pricing assets at the going rate in a new globally agreed accounting rule “is appropriate, in particular regarding long-term investing business models”.

To summarize: forced savings “mobilization”, the introduction of a collective and involuntary CapEx funding “savings” account, the return and expansion of securitization, and finally, tying it all together, is a change to accounting rules that will make the entire inevitable catastrophe smells like roses until it all comes crashing down.

So, aside from all this, Europe is “fixed.”

The only remaining question is: why leak this now? Perhaps it’s simply because the reallocation of “cash on the savings account sidelines” in the aftermath of the Cyprus deposit confiscation, into risk assets was not foreceful enough? What better way to give it a much needed boost than to leak that everyone’s cash savings are suddenly fair game in Europe’s next great wealth redistribution strategy.

Rolling Stone – The Vampire Squid Strikes Again: Mega Banks Most Devious Scam Yet….by Matt Taibbi

See Original article here at Rolling Stone
February 12, 2014
The Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet
Illustration by Victor Juhasz

Call it the loophole that destroyed the world. It’s 1999, the tail end of the Clinton years. While the rest of America obsesses over Monica Lewinsky, Columbine and Mark McGwire’s biceps, Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy – a law that would make possible a broader concentration of financial and industrial power than we’ve seen in more than a century.

Matt Taibbi on the Great American Bubble Machine

But the crazy thing is, nobody at the time quite knew it. Most observers on the Hill thought the Financial Services Modernization Act of 1999 – also known as the Gramm-Leach-Bliley Act – was just the latest and boldest in a long line of deregulatory handouts to Wall Street that had begun in the Reagan years.

Wall Street had spent much of that era arguing that America’s banks needed to become bigger and badder, in order to compete globally with the German and Japanese-style financial giants, which were supposedly about to swallow up all the world’s banking business. So through legislative lackeys like red-faced Republican deregulatory enthusiast Phil Gramm, bank lobbyists were pushing a new law designed to wipe out 60-plus years of bedrock financial regulation. The key was repealing – or “modifying,” as bill proponents put it – the famed Glass-Steagall Act separating bankers and brokers, which had been passed in 1933 to prevent conflicts of interest within the finance sector that had led to the Great Depression. Now, commercial banks would be allowed to merge with investment banks and insurance companies, creating financial megafirms potentially far more powerful than had ever existed in America.

All of this was big enough news in itself. But it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is “complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.”

Complementary to a financial activity. What the hell did that mean?

The Feds vs. Goldman

“From the perspective of the banks,” says Saule Omarova, a law professor at the University of North Carolina, “pretty much everything is considered complementary to a financial activity.”

Fifteen years later, in fact, it now looks like Wall Street and its lawyers took the term to be a synonym for ruthless campaigns of world domination. “Nobody knew the reach it would have into the real economy,” says Ohio Sen. Sherrod Brown. Now a leading voice on the Hill against the hidden provisions, Brown actually voted for Gramm-Leach-Bliley as a congressman, along with all but 72 other House members. “I bet even some of the people who were the bill’s advocates had no idea.”

Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they’re doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government’s ruling coalition, as the Danish public wondered how an American investment bank could possibly hold so much influence over the state energy grid.

There are more eclectic interests, too. After 9/11, we found it worrisome when foreigners started to get into the business of running ports, but there’s been little controversy as banks have done the same, or even started dabbling in other activities with national-security implications – Goldman Sachs, for instance, is apparently now in the uranium business, a piece of news that attracted few headlines.

Wall Street’s War

But banks aren’t just buying stuff, they’re buying whole industrial processes. They’re buying oil that’s still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they’re also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures market, swaps on the swaps market, etc.

Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. It’s something akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays.

The situation has opened a Pandora’s box of horrifying new corruption possibilities, but it’s been hard for the public to notice, since regulators have struggled to put even the slightest dent in Wall Street’s older, more familiar scams. In just the past few years we’ve seen an explosion of scandals – from the multitrillion-dollar Libor saga (major international banks gaming world interest rates), to the more recent foreign-currency-exchange fiasco (many of the same banks suspected of rigging prices in the $5.3-trillion-a-day currency markets), to lesser scandals involving manipulation of interest-rate swaps, and gold and silver prices.

But those are purely financial schemes. In these new, even scarier kinds of manipulations, banks that own whole chains of physical business interests have been caught rigging prices in those industries. For instance, in just the past two years, fines in excess of $400 million have been levied against both JPMorgan Chase and Barclays for allegedly manipulating the delivery of electricity in several states, including California. In the case of Barclays, which is contesting the fine, regulators claim prices were manipulated to help the bank win financial bets it had made on those same energy markets.

And last summer, The New York Times described how Goldman Sachs was caught systematically delaying the delivery of metals out of a network of warehouses it owned in order to jack up rents and artificially boost prices.

You might not have been surprised that Goldman got caught scamming the world again, but it was certainly news to a lot of people that an investment bank with no industrial expertise, just five years removed from a federal bailout, stores and controls enough of America’s aluminum supply to affect world prices.

How was all of this possible? And who signed off on it?

By exploiting loopholes in a dense, decade-and-a-half-old piece of financial legislation, Wall Street has effected a revolutionary change that American citizens never discussed, debated or prepared for, and certainly never explicitly permitted in any meaningful way: the wholesale merger of high finance with heavy industry. This blitzkrieg reorganization of our economy has left millions of Americans facing a smorgasbord of frightfully unexpected new problems. Do we even have a regulatory structure in place to look out for these new forms of manipulation? (Answer: We don’t.) And given that the banking sector that came so close to ruining the world economy five years ago has now vastly expanded its footprint, who’s in charge of preventing the next crash?

In this Brave New World, nobody knows. Moreover, whatever we’ve done, it’s too late to have a referendum on it. Garrett Wotkyns, an Arizona-based class-action attorney who has spent more than a year investigating the banks’ involvement in the metals markets and is suing Goldman and others over the aluminum case on behalf of two major manufacturers, puts it this way: “It’s like that line in The Dark Knight Rises,” he says. “‘The storm isn’t coming. The storm is already here.’”

To this day, the provenance of the “complementary activities” loophole that set much of this mess in motion remains something of a mystery. We know from congressional records that a vice chairman of JPMorgan, Michael Patterson, was one of the first to push the idea in House testimony in February 1999 and that, later that year, an early version of the bill put forward in the Senate by Phil Gramm also contained the provision.

But even one of the final bill’s eventual authors, Republican congressman Jim Leach, can’t remember exactly whose idea adding the “complementary activities” line was. “I know of no legislative history of the provision,” he says. “It probably came from the Senate side.”

Moreover, Leach was shocked to hear that regulators had pointed to this section of a bill bearing his name as the legal authority allowing banks to gain control over physical-commodities markets. “That’s news to me,” says the mortified ex-congressman, now a law professor at the University of Iowa. “I assume no one at the time would have thought it would apply to commodities brokering of a nature that has recently been reported.”

One thing that is clear in the public record is that nobody was talking, at least publicly, about banks someday owning oil tankers or controlling the supply of industrial metals.

The JPMorgan witness, Michael Patterson, told the House Financial Services Committee at the 1999 hearing that his idea of “complementary activities” was, say, a credit-card company putting out a restaurant guide. “One example is American Express, which publishes magazines,” he testified. “Travel + Leisure magazine is complementary to the travel business. Food & Wine promotes dining out . . . which might lead to greater use of the American Express card.”

“That’s how insignificant this was supposed to be,” says Omarova. “They were talking about being allowed to put out magazines.”

Even apart from the “complementary” provision, Gramm quietly added another time bomb to the law, a grandfather clause, which said that any company that became a bank holding company after the passage of Gramm-Leach-Bliley in 1999 could engage in (or control shares of a company engaged in) commodities trading – but only if it was already doing so before a seemingly arbitrary date in September 1997.

This meant that if you were a bank holding company at the time the law was passed and you wanted to get into the commodities business, you were out of luck, because the federal law prohibited banks from being involved in physical commodities or any other forms of heavy industry. But if you were already a commodities dealer in 1997 and then somehow became a bank holding company, you could get into whatever you pleased.

This was nuts. It was a little like passing a law that ordered you to leave the Army if you were gay in November 1999 – but if you were a heterosexual soldier as of September 1997 and then somehow became gay after 1999, you could stay in the Army.

To this day, nobody is exactly clear on what the grandfather clause means. If a company traded in tin before 1997 and then became a bank holding company in 2015, would it have to stick with tin? Or did the fact that it traded tin in 1997 mean the company could buy oil tankers and pipelines in 2020?

In 2012, the Federal Reserve Bank of New York – the most powerful branch of the Fed, the primary regulator of bank holding companies and the final authority on these things – put out a paper saying it had no clue about the exact meaning of the provision. “The legal scope of the exemption,” a trio of New York Fed officials wrote in July that year, “is widely seen as ambiguous.” Just a few weeks ago, the Fed’s director of banking supervision, Michael Gibson, told the Senate, “I’m not a lawyer,” and that it’s “under review.”

It almost didn’t matter. For nearly a decade, this obscure provision of Gramm-Leach-Bliley effectively applied to nobody. Then, in the third week of September 2008, while the economy was imploding after the collapses of Lehman and AIG, two of America’s biggest investment banks, Goldman Sachs and Morgan Stanley, found themselves in desperate need of emergency financing. So late on a Sunday night, on September 21st, to be exact, the two banks announced they had applied to the Federal Reserve to become bank holding companies, which would give them lifesaving access to emergency cash from the Fed’s discount window.

The Fed granted the requests overnight. The move saved the bacon of both firms, and it had one additional benefit: It made Goldman and Morgan Stanley, which both had significant commodity-trading operations prior to 1997, the first and last two companies to qualify for the grandfather exemption of the Gramm-Leach-Bliley Act. “Kind of convenient, isn’t it?” says one congressional aide. “It’s almost like the law was written specifically for them.”

The irony was incredible. After fucking up so badly that the government had to give them federal bank charters and bottomless wells of free cash to save their necks, the feds gave Goldman Sachs and Morgan Stanley hall passes to become cross-species monopolistic powers with almost limitless reach into any sectors of the economy.

And they weren’t the only accidental beneficiaries of the crisis. JPMorgan Chase acquired the commodity-trading operations of Bear Stearns in early 2008, after the Fed pledged billions in guarantees to help Chase rescue the doomed investment bank. Within the next two years, Chase also acquired the commodities operations of another failing bank, the newly nationalized Royal Bank of Scotland, which included Henry Bath, a U.K.-based company that owns a large network of warehouses throughout Europe.

As a result, entering 2010, these three companies were newly empowered to go out and start doubling down on investments in physical industry. Through a fortuitous circumstance, the cost of financing for bank holding companies had also dropped like a stone by the end of 2009, as the Fed slashed interest rates almost to zero in a desperate attempt to stimulate the economy out of its post-crash doldrums.

The sudden turning on of this huge faucet of free money seems to have been a factor in an ensuing commodities shopping spree undertaken by all three firms. Morgan Stanley, for instance, claimed to have just $2.5 billion in commodity assets in March 2009. By September 2011, those holdings had nearly quadrupled, to $10.3 billion.

Goldman and Chase – along with Glencore and Trafigura, a pair of giant Swiss-based conglomerates that were offshoots of a firm founded by notorious deceased commodities trader and known market manipulator Marc Rich – all made notably coincidental purchases of metals-warehousing companies in 2010.

The presence of these Marc Rich entities is particularly noteworthy. According to famed Forbes reporter Paul Klebnikov, who was assassinated in 2004 after years of reports on Russian corruption, Rich made a fortune in the early Nineties striking crooked deals with the Soviet bosses who controlled the U.S.S.R.’s supplies of raw materials – in particular commodities like zinc and aluminum. These deals helped create a fledgling class of profiteers among the bosses of the crumbling Soviet empire, a class that would go on years later to help push Russia out of its communist past into its kleptocratic present.

“He’d strike a deal with the local party boss, or the director of a state-owned company,” Klebnikov said back in 2001. “He’d say, ‘OK, you will sell me the [commodity] at five to 10 percent of the world-market price . . . and in return, I will deposit some of the profit I make by reselling it 10 times higher on the world market, and put the kickback in a Swiss bank account.’”

Rich made these reported deals while in exile from the United States, which he fled in 1983 after the U.S. government charged him with tax evasion, wire fraud, racketeering and trading with the enemy after being caught trading with rogue states like Iran, among other things. The state filed enough counts to put him away for life, and he remained a fugitive until January 2001, when a little-known Clinton administration Justice Department official named Eric Holder recommended Rich be pardoned. A report by the House Committee on Government Reform later concluded that Holder had not provided a credible explanation for supporting Rich’s pardon and that he must have had “other motivations” that he didn’t share with Congress. Among other things, the committee speculated that Holder had designs on the attorney general’s office in a potential Al Gore administration.

In any case, in 2010, a decade after the Rich pardon, Holder was attorney general, but under Barack Obama, and two Rich-created firms, along with two banks that have been major donors to the Democratic Party, all made moves to buy up metals warehouses. In near simultaneous fashion, Goldman, Chase, Glencore and Trafigura bought companies that control warehouses all over the world for the LME, or London Metals Exchange. The LME is a privately owned exchange for world metals trading. It’s the world’s primary hub for determining metals prices and also for trading metals-based futures, options, swaps and other instruments.

“If they were just interested in collecting rent for metals storage, they’d have bought all kinds of warehouses,” says Manal Mehta, the founder of Sunesis Capital, a hedge fund that has done extensive research on the banks’ forays into the commodities markets. “But they seemed to focus on these official LME facilities.”

The JPMorgan deal seemed to be in direct violation of an order sent to the bank by the Fed in 2005, which declared the bank was not authorized to “own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities.” The way the Fed later explained this to the Senate was that the purchase of Henry Bath was OK because it considered the acquisition of this commodities company kosher within the context of a larger sale that the Fed was cool with – “If the bulk of the acquisition is a permissible activity, they’re allowed to include a small amount of impermissible activities.”

What’s more, according to LME regulations, no warehouse company can also own metal or make trades on the exchange. While they may have been following the letter of the law, they were certainly violating the spirit: Goldman preposterously seems to have engaged in all three activities simultaneously, changing a hat every time it wanted to switch roles. It conducted its metal trades through its commodities subsidiary J. Aron, and then put Metro, its warehouse company, in charge of the storage, and according to industry experts, Goldman most likely owned some metal, though the company has remained vague on the subject.

If you’re wondering why the LME would permit a seemingly blatant violation of its own rules, a good place to start would be to look at who owned the LME at the time. Although it eventual­ly sold itself to a Hong Kong company in 2012, in 2010 the LME was owned by a consortium of banks and financial companies. The two largest shareholders? Goldman and JPMorgan Chase.

Humorously, another was Koch Metals (2.32 percent), a commodities concern that’s part of the Koch brothers’ empire. The Kochs have been caught up in their own commodity-manipulation schemes, including an episode in 2008, in which they rented out huge tankers and used them to store excess oil offshore essentially as floating warehouses, taking cheap oil out of available supply and thereby helping to drive up energy prices. Additionally, some banks have been accused of similar oil-hoarding schemes.

The motive for the Kochs, or anyone else, to hoard a commodity like oil can be almost beautiful in its simplicity. Basically, a bank or a trading company wants to buy commodities cheap in the present and sell them for a premium as futures. This trade, sometimes called “arbitraging the contango,” works best if the cost of storing your oil or metals or whatever you’re dealing with is negligible – you make more money off the futures trade if you don’t have to pay rent while you wait to deliver.

So when financial firms suddenly start buying oil tankers or warehouses, they could be doing so to make bets pay off, as part of a speculative strategy – which is why the banks’ sudden acquisitions of metals-storage companies in 2010 is so noteworthy.

These were not minor projects. The firms put high-ranking executives in charge of these operations. Goldman’s acquisition of Metro was the project of Isabelle Ealet, the bank’s then-global commodities chief. (In a curious coincidence commented upon by several sources for this story, many of Goldman’s most senior officials, including CEO Lloyd Blankfein and president Gary Cohn, started their careers in Goldman’s commodities division.)

Meanwhile, Chase’s own head of commodities operations, Blythe Masters – an even more famed Wall Street figure, sometimes described as the inventor of the credit default swap – admitted that her company’s warehouse interests weren’t just a casual thing. “Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture,” she said in 2010.

Loosely translated, Masters was saying that there was a limited amount of money to be made simply trading commodities in the traditional legal manner. The solution? “We need to be active in the underlying physical commodity markets,” she said, “in order to understand and make prices.”

We need to make prices. The head of Chase’s commodities division actually said this, out loud, and it speaks to both the general unlikelihood of God’s existence and the consistently low level of competence of America’s regulators that she was not immediately zapped between the eyebrows with a thunderbolt upon doing so. Instead, the government sat by and watched as a curious phenomenon developed at all of these new bank-owned warehouses, in the aluminum markets in particular.

As detailed by New York Times reporter David Kocieniewski last July, Goldman had bought into these warehouses and soon began pointlessly shuttling stocks of aluminum from one warehouse to another. It was a “merry-go-round of metal,” as one former forklift operator called it, a scheme of delays apparently designed to drive up prices of the metal used to make the stuff we all buy – like beer cans, flashlights and car parts.

When Goldman bought Metro in February 2010, the average delivery time for an aluminum order was six weeks. Under Goldman ownership, Metro’s delivery times soon ballooned by a factor of 10, to an average of 16 months, leading in part to the explosive growth of a surcharge called the Midwest premium, which represented not the cost of aluminum itself but the cost of its storage and delivery, a thing easily manipulated when you control the supply. So despite the fact that the overall LME price of aluminum fell during this time, the Midwest premium conspicuously surged in the other direction. In 2008, it represented about three percent of the LME price of aluminum. By 2013, it was a whopping 15 percent of the benchmark (it has since spiked to 25 percent).

“In layman’s terms, they were artificially jacking up the shipping and handling costs,” says Mehta.

The intentional warehouse delays were just one part of the anti-capitalist game the banks were playing. As an incentive to get metal under their control, they actually paid the industrial producers of aluminum extra cash to store the metal in their warehouses, fees reportedly as much as $230 a metric ton.

Both Goldman and Glencore reportedly offered such incentives, which not only allowed the companies to collect more rent (Goldman was charging a daily rate of 48 cents a metric ton) but also served to discourage industrial producers like Alcoa or the Russian industrial giant Rusal (which has Glencore CEO Ivan Glasenberg on its board of directors) from selling directly to manufacturers.

The result of all this was a bottlenecking of aluminum supplies. A crucial industrial material that was plentiful and even in oversupply was now stuck in the speculative merry-go-round of the bank finance trade.

Every time you bought a can of soda in 2011 and 2012, you paid a little tax thanks to firms like Goldman. Mehta, whose fund has a financial stake in the issue, insists there’s an irony here that should infuriate everyone. “Banks used taxpayer-backed subsidies,” he says, “to drive up prices for the very same taxpayers that bailed them out in the first place.”

Dave Smith, Coca-Cola’s strategic procurement manager, told reporters as early as the summer of 2011 that “the situation has been organized to artificially drive up premiums.” Nick Madden, the chief procurement officer of Novelis, a leading can-maker, said at roughly the same time that the delays in Detroit were adding $20 to $40 a metric ton to the price of aluminum.

Coca-Cola was the first to file a complaint against Goldman over the warehouse issue, doing so in mid-2011, and many people in and around the industry weren’t surprised that it was the world’s biggest and most powerful corporate consumer of aluminum that came forward first. Other manufacturers, many believe, kept their mouths shut out of fear the banks would punish them. “It’s very likely that commercial companies deliberately avoided an open confrontation with Goldman because it was a Wall Street powerhouse with which they had – or hoped to establish – important credit and financial-advisory relationships,” says Omarova. One government official who has investigated the issue for Congress said even some of the country’s largest aluminum users have been reluctant to come forward. “When some of these huge transnationals don’t want to talk about it, it makes you wonder,” the aide noted.

SStill, a few days after the Times published its aluminum-storage exposé in late July 2013, Sen. Brown held hearings to investigate the causes of the alleged manipulation. (One executive, Tim Weiner of MillerCoors, would testify that global aluminum costs for manufacturers had been inflated by $3 billion in just the past year.) After those hearings, and after word leaked out that regulatory agencies had launched investigations, Goldman curtly announced new plans to reduce the delivery times of its aluminum stocks. The bank has consistently maintained that its interest in the warehouse company Metro is not “strategic,” that it only bought the firm “as an investment,” and will sell it within 10 years. JPMorgan Chase and other banks announced that it might be getting out of the physical commodities business altogether. The LME, meanwhile, had already come up with plans to force its member warehouses to increase their output of aluminum.

A few weeks later, on August 9th, 2013, a company called CME Group – one of the world’s leading derivatives dealers – announced that it would henceforth be selling a new kind of aluminum swap futures contract. The new instrument, the firm said, would be “the first Exchange product that enables the aluminum Midwest premium to be managed.”

What this signaled was that before that moment, no one in the financial sector wanted to get within a hundred miles of selling price insurance against the Midwest premium, because it was so obviously corrupt. But then the Times let the cat out of the bag, and next thing you knew, now that everyone was watching, a major derivatives purveyor suddenly felt confident enough to sell a hedging insurance against the Midwest premium, given that it was now presumed, once again, to be free from manipulation and subject to market forces.

“That should tell you a lot about how completely people in the business understood that the metals market was broken,” says Wotkyns.

One other bizarre footnote to the aluminum scandal: According to the Bank Holding Company Act of 1956, any company that becomes a bank holding company must divest itself of certain commercial holdings it may own within two years. To that two-year grace period, the Fed may add up to three additional years. This was done for both Goldman and Morgan Stanley. The aluminum scandal broke, coincidentally, just a few months before Goldman’s five-year grace period was scheduled to end. There was some expectation that the Fed might order the banks to divest some of their commercial holdings.

But there was a catch. “Congress in its infinite wisdom left an ambiguity,” says Omarova. Although the Bank Holding Company Act mandated that the companies had to be compliant at the end of the review period, it didn’t actually specify what the Fed had to do if they weren’t. When Goldman’s review period passed, “the Fed took the position that nothing had to happen,” says Omarova. “So nothing happened.”

The aluminum delays were not just an isolated incident of banks scheming to boost rent revenue. Recently, evidence has surfaced that the same kinds of behavior may be going on across the LME. In order for a parcel of metal to be traded on the LME, it has to be what’s called “on warrant.” If you are the owner of a metal that you no longer want to be traded, you can “cancel the warrant” – essentially taking it out of the system. It’s still in the warehouse, but in a kind of administrative limbo.

When the world LME supply of a metal features high percent­ages of canceled stock, that typically means someone is moving metals around a lot even after they’ve been put into storage – perhaps in a Goldman-style “merry-go-round,” perhaps for some other reason, but historically it has not been something seen often in functioning, healthy metals markets.

In January 2009, before the American too-big-to-fail banks and the shady Swiss commodities giants bought into all of these warehouses, less than one percent of the total global supply of LME aluminum was “canceled warrant.” Today, with world supplies of aluminum about double what they were then, 45.2 percent of the total stock is classified as canceled. In Detroit, where Goldman is supposedly cleaning things up, the percentage is even crazier: 76.9 percent of the aluminum stock has canceled warrants.

You can see hints of the phenomenon in other LME metals. Five years ago, just 1.3 percent of the LME’s copper stocks had canceled warrants. Today, 59 percent of it does. In January 2009, just 2.3 percent of zinc stocks were canceled; it’s at 32 percent today. Zinc incidentally has something else in common with aluminum – a shipping-and-handling-like premium, called the U.S. zinc premium in the United States, which has skyrocketed in recent years, increasing by 400 percent between the summer of 2012 and the summer of 2013, when the price plateaued just as the aluminum scandal broke.

Then there’s nickel. Thirty-seven percent of the global stock is now classified as canceled. Five years ago, 0.5 percent was. One industry insider, who is very familiar with and utilizes the nickel market, says that despite the fact that there is a massive global oversupply of the metal, prices are being artificially propped up as much as 20 to 30 percent.

He blames the banks’ speculative weigh stations, saying that nickel producers, despite low global demand, are cheerfully selling their stocks to bank-run warehouses, which are paying above-market prices to put raw materials into the merry-go-round. “They are happy to sell to the banks and to the warehouse supply, while they pray for demand to pick up,” the insider said.

This leads to the next potentially disastrous aspect of this story: What happens if the Fed suddenly raises interest rates, and the banks, their access to free money cut off, can no longer afford to sit on piles of metal for 16 months at a time?

“Look at nickel,” says Eric Salzman, a financial analyst who has done research on metals manipulation for several law firms. “You could see the price drop 20 to 30 percent in no time. It’d be a classic bursting of a bubble.”

But the potential for wide-scale manipulation and/or new financial disasters is only part of the nightmare that this new merger of banking and industry has created. The other, perhaps even darker problem involves the new existential dangers both to the environment and to the stability of the financial system. Long before Goldman and Chase started buying up metals warehouses, for instance, Morgan Stanley had already bought up a substantial empire of physical businesses – electricity plants in a number of states, a firm that trades in heating oil, jet fuels, fertilizers, asphalt, chemicals, pipelines and a global operator of oil tankers.

How long before one of these fully loaded monster ships capsizes, and Morgan Stanley becomes the next BP, not only killing a gazillion birds and sea mammals off some unlucky country’s shores but also taking the financial system down with them, as lawsuits plunge the company into bankruptcy with Lehman-style repercussions? Morgan Stanley’s CEO, James Gorman, even admitted how risky his firm’s new acquisitions were last year, when he reportedly told staff that a hypothetical oil spill was “a risk we just can’t take.”

The regulators are almost worse. Remember the 2008 collapse happened when government bodies like the Fed, the Office of the Comptroller of the Currency and the Office of Thrift Supervision – whose entire expertise supposedly revolves around monitoring the safety and soundness of financial companies – somehow missed that half of Wall Street was functionally bankrupt.

Now that many of those financial companies have been bailed out, those same regulators who couldn’t or wouldn’t smell smoke in a raging fire last time around are suddenly in charge of deciding if companies like Morgan Stanley are taking out enough insurance on their oil tankers, or if banks like Goldman Sachs are properly handling their uranium deposits.

“The Fed isn’t the most enthusiastic regulator in the best of times,” says Brown. “And now we’re asking them to take this on?”

Banks in America were never meant to own industries. This principle has been part of our culture practically from the beginning of our history. The original restrictions on banks getting involved with commerce were rooted in the classically American fear of overweening government power – citizens in the early 1800s were concerned about the potential for monopolistic abuses posed by state-sponsored banks.

Later, however, Americans also found themselves forced to beat back a movement of private monopolies, in particular the great railroad and energy cartels built by robber barons of the Rockefeller type who, by the late 1800s, were on the precipice of swallowing markets whole and dictating to the public the prices of everything from products to labor. It took a long period of upheaval and prolonged fights over new laws like the Sherman and Clayton anti-trust acts before those monopolies were reined in.

Banks, however, were never really regulated under those laws. Only the Great Depression and years of brutal legislative trench warfare finally brought them to heel under the same kinds of anti-trust concepts that stopped the robber barons, through acts like Glass-Steagall and the Bank Holding Company Act of 1956. Then, with a few throwaway lines in a 1999 law that nobody ever heard of until now, that whole struggle went up in smoke, and here we are, in Hobbes’ jungle, waiting for the next fully legal catastrophe to unfold.

When does the fun part start?

This story is from the February 27th, 2014 issue of Rolling Stone.

 

 

Natural Gas & Precious Metal Prices to Spike Higher in 2014……by SRSrocco

Natural Gas & Precious Metal Prices To Spike Higher In 2014

Filed in EnergyPrecious Metals by  on February 13, 2014

Something quite interesting is taking place in the U.S. natural gas market this year.  As frigid temperatures blanketed the entire East Coast this winter, record natural gas demand has resulted in multi-year lows in gas storage levels.

The EIA came out with their Natural Gas Storage Report today showing a stunning 34% lower gas storage level compared to the same time last year.

U.S. Natural Gas Storage 21314

If you look at the light blue line (2014 storage trend), you will notice that current gas storage level is already below the lowest level reached at the end of March, 2013.  The dark blue dashed-line is my estimation of where the storage level will be by the end of March this year.

Furthermore, the lowest 5- year range of gas storage has never fallen below 1,600 billion cubic feet.  The data from the EIA Natural Gas Storage table shows that we have already reached this extreme low point.

U.S. Natural Gas Storage Table 21314

Last year’s Feb. 7th storage level was 2,549 Bcf (billion cubic feet), whereas this year the amount is 863 Bcf lower at 1,686 Bcf.  This is very disconcerting because the market will continue to draw gas supplies from underground storage until the end of March (based on 5-year trends).

Energy analyst Bill Powers (who I interviewed in January) believes we could see a gas storage level at 1,200 Bcf by the end of this month.  If the cold weather pattern plaguing the North East continues for the rest of the winter, we could see the U.S. gas storage level reach 800 Bcf by the end of March.

If the natural gas storage level falls this low, it will put severe strain on the U.S. natural gas market going into the spring and summer (the time when the industry begins to rebuild the underground storage supplies).  Already traders are pushing the price of natural gas well above the $5 level:

Bloomberg Natural Gas Price Feb 13 2014

UPDATE:  The price of Natural Gas closed up $0.40 (8.3%) at $5.22 today and is currently up $0.07 (1.3%) at $5.29 in the foreign markets.

Bill Powers (last year) forecasted that prices of natural gas would reach $5-$7 with much higher spikes in the next few years.  We have already reached $5 level and will more than likely see much higher natural gas prices as the record draw-down of underground gas storage continues.

Another factor that could result in much higher natural gas price spikes is the inability for the industry to maintain current shale gas production.  As I mentioned in my earlier article, 2014: The Year The Shale Gas Bubble Bursts & The Boom For Precious Metals?, the annual U.S. natural gas decline rate is a staggering 24%.

Thus, the industry has to replace nearly 100% of its production in 4 years to keep production flat — much less growing.  This is a whole lot of gas folks.

I will provide more details of the U.S. and world energy situation in my upcoming U.S. & GLOBAL COLLAPSE REPORT out later this month.

I recommend Bill Powers book, Exploding The Natural Gas Myth: COLD, HUNGRY AND IN THE DARK.  You can also follow him at his twitter address below:

https://twitter.com/billpowers1970

Big Spikes In the Precious Metals Coming In 2014?

Kitco Gold & Silver 21314

As the price of natural gas topped above $5 today, Gold finally surpassed the psychological $1,300 level.  This is quite interesting as the largest gold producer on the planet, Barrick just released its Q4 2013 results showing  “All-in costs” for mining gold at $1,317 an ounce.

As record demand for the yellow metal continues in 2014, the current price of gold is still below the total cost of production from one of the largest gold miners in the world.

The problem now plaguing the mining and energy industry is the huge increase in capital expenditures as prices remain flat (oil) or decline (gold).

For example, Goldcorp produced 2.6 million oz of gold in 2013, but stated an estimated negative $1.3 billion in Free Cash Flow.  Free cash flow is different from cash flow.  To get Free Cash flow, you deduct capital expenditures and dividends from the operation cash flow.

What this means is that Goldcorp is spending more on Capex and dividends than it is making by its operations.  Goldcorp isn’t the only gold producer suffering from negative free cash flow, many of the top gold miners are as well.

For example (according to Y-charts.com), Barrick stated a negative $913 million in free cash flow for the first nine months of 2013.  I would imagine this figure will increase as the results from the fourth quarter are included.

So the here’s the question… how can the top gold miners report $1,100-$1,300 All-in costs, when their free cash flow is negative?  Of course some of the capital expenditures are for new projects, but many of these new mining projects will add production just to offset declines or planned shut-downs from older mines.

2014 may indeed be the pivotal year for the financial markets.  There are so many negative factors going forward, I believe the broader stock & bond markets will finally succumb to the weight of the Hundred Trillion Dollar Derivative Monster.

David Stockman, Former Director of the U.S. Office Management & Budget spoke about the huge derivative bubble in a recent interview with King World News.  He believes Fed Chairman Janet Yellen and the Keynesians at the Fed are playing with “Fire” with their insane monetary policy.

Eric King asked David Stockman’s opinion about the Fed’s massive trading room:

That (Fed) trading room is a weapon of financial mass destruction.  That is the point that people need to understand.  The people running the Fed today have no clue of the danger that they are creating with this massive market manipulation and intervention.

The market isn’t trading on fundamentals whatsoever.

…… you know, the Gold Market could explode at any moment.

Stockman really sums up the entire financial situation in those few sentences.  If you haven’t listened to the interview, I highly recommend it.

As the U.S. and world move closer towards financial collapse, the volatility in the markets will continue to increase.  With the price of gold and silver still near their cost of production, I believe the volatility will impact the precious metals in a positive way, whereas the broader stock markets will suffer the opposite reaction.

2014 may well be the year that the price of natural gas, gold and silver all spike together.

I will be providing updates on Silver & Gold Eagle sales at the U.S. Mint, break-even analysis of the top 12 primary silver miners and energy data in the upcoming weeks.  Please check back at the SRSrocco Report for new posts and articles.

Let’s Get Physical Gold …. by John Hathaway

Original article here at Tocqueville.com

 

Let’s Get Physical

 

Money printing by world central banks, it would seem, has propelled the prices of all things rare. The list includes fine art, vintage wines and antique sports cars. It is front page news that the flood of paper money has enhanced the quotation of almost any tangible asset perceived to be in scarce supply. In a 11/23/13 article, The Economist reports: “Evermore wealth is being parked in fancy storage facilities….The goods they stash in freeports range from paintings, fine wine and precious metals to tapestries and even classic cars.” The article observes that a key factor fuelling “this buying binge…is growing distrust of financial assets.” It doesn’t hurt that the prices of most of these items have trended steadily higher in price over the past decade.

Most intriguing in this array of ascendant alternative assets, however, is the crypto currency known as Bitcoin, whose advocates offer a rationale that is striking in its parallel to that for holding gold bullion. Bitcoin, as almost everyone knows, is a liquid transactional medium of strictly limited supply. The parallel breaks down, of course, when it comes to price behavior of these two otherwise similar alternative currencies. The price of a Bitcoin has increased to $975/coin (Mt. Gox 12/10/13) from less than $25 in May 2011. At the end of May 2011, bullion traded near $1500/oz, and is quoted today at a price that is 17% lower.

The supply of gold has increased over the past two years by 180 million ounces. As an increment to the existing stock of above ground gold, the percentage works out to about 1.5%/year. In the meantime, the US monetary base increased 14%, or an annual rate of 6.7%.

The supply of Bitcoins is fixed at 21 million. There are 11.5 million in circulation. Mining new Bitcoins requires incrementally more massive upgrades in computing power. According to Raoul Pal’s Global Macro Newsletter of 1/11/13 as seen on Zero Hedge, Bitcoin’s success is due to the fact that “the man in the street understands that central banks and governments are going to take their money via confiscation or default or devaluation and it (Bitcoin) is their way of voting against it and them.”

The man in the street has apparently overlooked the similarities between gold and Bitcoin. The future supply of newly mined gold would seem to be in jeopardy if current pricing holds. The same cannot be said for US dollars. While mine output may continue for a year or two at the current pace, production post 2015 seems set to decline and perhaps sharply. Discovery of new gold bearing ore bodies is down sharply. Miners are challenged by declining grades, poor investment returns, worsening access to capital, and increasing risks due to political instability in gold producing countries, rising tax burdens and growing permitting challenges. At current prices, most gold mining companies are barely breaking even on an “all-in” cost accounting basis.

The Bitcoin-gold incongruity is explained by the fact that financial engineers have not yet discovered a way to collateralize bitcoins for leveraged trades. There is (as yet) no Bitcoin futures exchange, no Bitcoin derivatives, no Bitcoin hypothecation or rehypothecation. In 2000, gold expert Jeff Christian of the CPM Group wrote:

Imagine, if you will, that the (bullion) bank can line up three or more producers and others who want to borrow this gold. All of a sudden, that one ounce of gold is now involved in half a dozen transactions. The physical volume has not changed, but the turnover has multiplied. This is the basic building block of bullion banking.” (Bullion Banking Explained – February 2000). He went on to say that “many banks use factor loadings of 5 to 10 for their bullion, meaning that they will loan or sell 5 to 10 times as much metal as they have either purchased or committed to buy. One dealer we know uses a leverage factor of 40.

The buying and selling of paper gold is the traditional business of bullion banking. It is the core of how business is conducted in the world of gold. Gold miners mine and concentrate gold ore. They send concentrates from the mine site to refiners who purify the ore into bars that are 99.99% gold. Refiners remit cash to the mining companies crediting them for gold content in the ore minus impurities. Refiners sell their gold bars, typically to bullion banks in London, where the physical gold is received for deposit in allocated or unallocated pools and held for distribution to users such as the jewelry trade, industry or mints. The physical gold that remains in London as unallocated bars is the foundation for leveraged paper gold trades. This chain of events is perfectly ordinary and in keeping with time honored custom.

What is interesting, and perhaps not surprising, is the way in which a solid business model has been perverted by extraordinary leverage into an important, unregulated trading profit center for large banks and hedge funds wholly unrelated to the needs of miners, jewelry manufacturers, and other industrial users. In its 2013 study related to gold, the Reserve Bank of India (RBI) commented: “In the Financial Markets, the traded amount of “paper linked to gold” exceeds by far the actual supply of physical gold: the volume on the London Bullion Market Association (LBMA of which the RBI is a member) OTC market and the other major Futures and Options Exchanges was over 92 times that of the underlying Physical Market.”

 

The LBMA reported that average daily volume of gold cleared in June 2013 was 29 million ounces, a new record. The LBMA estimated in 2011 that trading was 10x clearing volume. Assuming this ratio has held over the past two years, trading volume is the equivalent of 9000 metric tons of gold on a daily basis, compared to annual mine production of 2800 metric tons.

Compliant and unwitting central banks leave much of their gold on deposit in London, to be “managed” by the Bank of England, presumably to produce earnings on an otherwise dormant asset. For example, the central banks of Finland and Sweden announced last month that approximately half of their gold was somewhere in London earning something. Reassuring language from the Bank of Finland suggested that “the risks associated with gold investments are controlled using limits, investment diversification and limitations regarding run times.”

It would not be surprising if “run times” on leasing arrangements of central bank gold span decades. 1970’s documents recently declassified or otherwise unearthed contain extensive discussions among high level policy makers including Volcker, Kissinger, Arthur Burns and others expressing various concerns over the implications of a rising gold price. The policy objective in those days was to establish the SDR and the US dollar as the foundation of a “durable, stable (international financial) system”, an objective which was deemed “incompatible with a continued important role for gold as a reserve asset.” It was therefore resolved to “encourage and facilitate the eventual demonetization of gold …and (to) encourage the gradual disposition of monetary gold through sales in the private market.” (from a 1974 memo written by Sidney Weintraub, Deputy Assistant Secretary of State for International Finance and Development to Paul Volcker, Under Secretary of the Treasury for Monetary Affairs).
At the November, 2013 Metals and Mining Conference in San Francisco, keynote speaker Ron Paul and former lawyer to Governor Ronald Reagan, Art Costamagna, reminisced about their service together for the 1981-1982 Reagan Gold Commission. They noted that the Commission was not allowed to initiate an audit of the Fort Knox gold depository. Paul stated from the podium that no member of Congress has any real information on the status of that gold. He believed that the gold was still physically located at Fort Knox but most likely encumbered by complex derivative transactions.

Several observers have noted the difficulty Germany has encountered in requesting the repatriation of its gold held on deposit at the New York Fed. A return of physical gold that could be easily accomplished in two trans-Atlantic cargo flights must be stretched out over seven years, Germany was informed by the custodian of their gold, the New York Fed. However, the Germans were cordially invited to view their gold bars in the meantime. The reasons for the stretched out delivery schedule are not given by government officials, but we surmise that the difficulty relates to the unwinding of a web of leasing arrangements in which specific bars have been re-hypothecated, perhaps hundreds of times, over many decades. Who knows what counter parties were involved, not to mention their obligations or responsibilities?

One wonders whether the German request was the beginning of a run on the institutional arrangements that govern global depositories of unallocated physical gold. For those of us who have cheered the withdrawl of physical collateral from the system because of its potential tightening effect on derivative transactions, the short term effect may have been to depress the price of paper gold because there is less physical to support the frenetic trading of paper reported in the financial media. The shrinkage of collateral availability may be analogous to a contraction of credit which in a general sense drives down asset prices. At the end of credit liquidation cycles, however, collateral seems to wind up in the strongest hands. While most of the trading in paper gold nominally takes place on Comex, there is a parallel and much larger over the counter and derivatives market based in London where physical trades are also settled. The LBMA vets refiners, dealers, bar purity and other technical matters. It is a trade organization consisting of 143 members ranging from bullion banks, central banks, fabricators, refiners, and brokers who have some participation in the settlement of physical and paper trades. LBMA reports the results of the two daily London Gold Fixes but otherwise has no substantive input, supervisory or regulatory. According to a 11/26/13 Bloomberg dispatch, the fix is controlled by London Gold Market Fixing Ltd, an entity owned by five bullion banks. While the process is unregulated, one of the member banks went on the record for Bloomberg stating that the company has a “deeply rooted compliance culture and a drive to continually look toward ways to improve our existing processes and practices.”
From a regulatory point of view, the City of London is an entity unto itself, with a peculiar and special status, incorporated separately from greater London. It is the birthplace of the offshore banking industry and, as described by Nicholas Shaxson, author of Treasure Islands, the city “provides endless loopholes for U.S. financial corporations and many U.S. banking catastrophes can be traced substantially to those companies’ London Offices.” A July, 2010 Working Paper titled “The (sizable) Role of Rehypothecation in the Shadow Banking System” asserts that in the UK, an “unlimited amount of the customer’s assets can be rehypothecated and there are no customer protection rules.” (Rehypothecation occurs when the collateral posted by a prime brokerage client (e.g., hedge fund) to its prime broker is used as collateral also by the prime broker for its own purposes.) The London offices of AIG, JP Morgan, MF Global and others took advantage of the local “regulation lite” to fund off balance sheet ventures that would ultimately impair corporate and customer credit. It would be hard to imagine that the culture of the City did not extend to gold. In fact, the intersection of the shadow banking system and the pool of unallocated bullion does much to explain the proliferation of paper gold supply.

For the moment, the primary function of the paper gold market appears to be to enable macro hedge fund traders to express bets on the likelihood and timing of tapering the pace of quantitative easing. Made possible by lax oversight, weak accounting systems and otherwise dubious connections to underlying physical, the paper gold market offers substantial capacity for money flows wishing to take a stance on the expected shift in Fed policy. Unlike the physical gold market, which is not amenable to absorbing large capital flows, the paper market through nearly infinite rehypothecation is ideal for hyperactive trading activity, especially in conjunction with related bets on FX, equity indices, and interest rates.
Are high frequency and algorithmic traders that account for over 90% of the futures volume currently having a field day with this worn out trade paying any attention to the steady drain of physical gold on which their speculations are based? As is usually the case in a temporarily successful momentum trade where almost the entire universe is aboard, the answer is probably not. The precipitous 2013 drop in Comex warehouse stocks and ETP holdings has been widely reported. It is also well known that physical gold is showing up in record amounts in China. The manager of one of the largest Swiss refiners stated (12/10/13-In Gold We Trust website) that after almost doubling capacity this year, “they put on three shifts, they’re working 24 hours a day,….and every time (we) think it’s going to slow down, (we) get more orders…..70% of their kilo bar fabrication is going to China.” In his 37 years in the business, he has never experienced this degree of difficulty in sourcing physical metal. In some cases, they are recasting good delivery bars from the 1960’s. He added that there is no evidence of any return of these massive import flows back into Western hands.

China appears to be bent on becoming a dominant force in the physical gold market. There are eight refineries in mainland China converting 400 oz. London good delivery bars into Kilo bars, the preferred format in Asia. An increasing flow of physical is bypassing London and going straight to China. China has not shown its hand in the official sector. At last report (five years ago), China holds only 1000 tonnes of gold in official reserves. Current market weakness certainly benefits large buyers of physical as well as their fiscal agents in Western financial markets. China may be attempting to help their cause by understating import levels and by overstating domestic production. The CEO of a major Canadian mining company, whose research group has done due diligence on every existing producing mine of significance in the world, including China (over 2000 properties globally) believes that domestic Chinese production is less than half of what is reported officially. We have also heard credible stories from other mining executives to the effect that short reserve lives will mean a significant decline in future domestic production. Also uncaptured in Hong Kong import numbers are direct shipments from Russian production, which are said to be conveyed by the Chinese military. The Chinese government continues to encourage its citizens to buy physical gold, but why? Our guess is that Chinese policy makerss take a different view of the future price than Western hedge funds, and we suspect they have a superior grasp of where the gold price is headed.

Rising demand for physical is not simply an Asian phenomenon. The December 3, 2013 U.S. Commodity Futures Trading Commission report shows that commercials, the category which includes bullion banks, have substantially reduced their massive short exposure over the past year while the short exposure of large traders, mainly hedge funds have approached record highs for 2013. The CFTC bank participation report which includes 20 banks shows a swing from a net short position in December 2012 of 106,400 contracts to a net long position of 57,400 contracts for December 2013. Long contracts held by bullion banks are being used to claim physical gold stored at Comex warehouses. JP Morgan accounted for more than 90% of December deliveries. The category of registered bars which must be delivered upon notice stands at a two year low and is not far from a ten year low.

 

It seems to us that the physical flows we have outlined cannot be supported by new mine supply or scrap only. In our view, these flows could only be accommodated by a significant amount of destocking, the prime source of which would appear to be vaults of unallocated gold in London. While it appears that Western traders don’t seem to mind if their paper claims have a credible backing by physical, we can think of three reasons why this may change and lead to an epic short squeeze: regulatory scrutiny, suspect bookkeeping, and the realization that cash (in the bank) may no longer be king.

1.   The limits to leverage are unknown as are the potential flashpoints to collapse the pyramid. The disappearance of collateral may have depressed gold prices in the short term, assuming there is any integrity to the requirements for collateral backing. It is only our speculation, but we believe that increased regulatory scrutiny could provide a major splash of cold water. Such scrutiny could lead, among others things, tighter standards for collateral, rules on rehypothecation, etc. This could well lead to a scramble for physical.

On 11/19/13, the UK Financial Conduct Authority announced that it is reviewing gold benchmarks as part of their wider probe on how global rates are set. Why should the gold market be excluded from review when many of the bullion banks have already been found guilty and paid fines for the manipulation of Libor, energy, biofuels, and aluminum prices or benchmarks? On November 27th, the German financial watchdog, BaFin, announced it was looking into allegations of possible manipulation by banks in gold and silver price-fixing. A WSJ 11/29/13 article began with the innocuous headline: “UBS to Restructure Foreign-Exchange Unit.” The bank is rolling its foreign-exchange and precious metals business into another unit, with the co-head of the unit stepping down to explore “other opportunities in the bank.” In addition to other actions, the bank has also “clamped down on the use of electronic chat rooms by its staff. Chat rooms face scrutiny from regulators as venues for potential collusion and market manipulation.”

On December 5th, Deutsche Bank announced that it would cease trading energy, agriculture, base metals, coal, and iron ore, while retaining precious metals and a limited number of financial derivatives traders. It cited mounting regulatory pressure.” It is more than curious that a similar announcement from JP Morgan in July of 2013 noted that the bank’s exit from commodities trading did not include an exit from precious metals. The exclusion of gold from the newly enacted Volcker rule is the reason these banks are able to retain their precious metals proprietary trading activities.  It appears that in the eyes of Washington policy makers, all commodities are not created equal.

In the US, regulators including the US Federal Energy Regulatory Commission are “aggressively targeting uneconomic trading in a crackdown on potential market manipulation” according to Shaun Ledgerwood, senior consultant at the Brattle Group. From his June 2013 white paper, Uneconomic trading, market manipulation and baseball: “A key common feature …is that trades used to trigger the alleged schemes were designed to lose money on a stand-alone basis, while benefiting related physical or financial positions.”

The CFTC is examining position limits on spot trades for gold and other precious metals. CFTC Commissioner Gensler’s deadline for a resolution of the issue is Q1 2014. Among the issues to be settled is how to account for entry of orders by affiliated entities, an area of suspected potential abuse. In question also is whether new Comex position limits, should they be imposed, apply to trades settled in London. The CFTC board is in transition due to the departure of Gensler and two other vacancies on the five member body. Therefore, it remains to be seen when the Commission will act on this issue. Nevertheless, we think that the discussion surrounding the surfacing of this issue is constructive and that the potential enactment of more restrictive rules on limits could be positive development in the direction of more orderly trading. It should come as no surprise that bullion banks are lobbying hard against position limits.

The cumulative discrepancy since 1970 between paper markets in the West and physical markets in the East is displayed in the chart below. It is difficult to fathom how such a discrepancy can exist in the same asset. It is a mystery that we expect might be of interest to the appropriate regulators.

Where scrutiny and possible new regulation leads and what it means for the gold market is only a speculation at this stage. However, we speculate that it will result in a big win for those of us who remain bullish on the future price. In the words of former Supreme Court Justice Louis Brandeis, “sunlight is the best disinfectant.”

2.   The intermediation arrangements between the physical and paper gold markets may come under scrutiny for reasons other than regulatory oversight. The LBMA, Comex, and even gold backed ETFs depend on market trust in the ability of owners of paper claims to exchange those claims for physical gold. For unallocated bars vaulted in London, the complexity of cross ownership claims and entitlements to the underlying physical must be bewildering in light of the amount of re-hypothecation necessary to support the kind of frantic trading activity reported by the LBMA. It would not seem out of order to ask whether there are parties asleep at the switch on both sides of the trade – the central banks who lease gold into the pool, and the bullion bank back offices in charge of record keeping. Cutting corners in procedures to protect the chain of ownership of physical to speed transactions to support a pyramid of leverage is not an unreasonable nightmare to awaken central bank custodians whose principal charge is asset protection. Does anyone in bullion banking recall robo mortgage signing?

The pool of unallocated gold bullion in London is the center of the bullion banking system. The gold is vaulted at multiple locations in the hands of separate institutions. Disclosure is minimal and to our knowledge there has never been a comprehensive audit of the bullion and, more important, the systems on which the clearing process is dependent. We have heard instances of where private requests for delivery of allocated gold have been refused. While it is a simple matter for an owner of allocated gold bars to view the metal and check bar numbers against a statement of ownership, it is an entirely different matter to prove solitary unencumbered ownership. It is a matter of trust.

We believe that the very real possibility of an indecipherable web of multiple claims on the same bar of gold should concern both central bank owners, grass roots constituents of politicians in Europe and elsewhere pushing for repatriation, and private investors who hold paper claims against the metal. The potential for slipshod book keeping is a legitimate issue that could lead to a significant decrease in the amount of central bank gold available for lease.

3.   The risk of holding a significant portion of personal wealth within the framework of conventional banking and securities arrangements is on the increase. Simon Mikhailovich of Eidesis Capital LLC states in the November 15 issue of Grant’s: “In the old framework, cash was a risk-free asset. In the new paradigm of systemic risks, no asset (even cash) is risk-free so long as it is in custody of a financial institution. Investors and depositors no longer have clear title to their own assets if they are held in financial accounts. There is now a body of law (including Dodd-Frank) that allows custodial assets to be swept into the bankruptcy estate and be subordinated to senior claims.” Hand in hand with the evolution of the banking laws is the subtle but pernicious evolution of the practice of banking: “Various rules and practices have made it almost impossible to use cash and securities. Go try to make large cash withdrawal or cash deposit and see what paperwork you would be forced to complete.”

Should we worry about cash in the bank? Never mind that policy makers and respected private economists are openly campaigning to debase paper currency. “In Fed and Out, Many Now Think Inflation Helps” was the headline for a New York Times article on 10/26/13. “(Fed) critics, including Professor Rogoff, say the Fed is being much too meek. He says that inflation should be pushed as high as 6% a year for a few years.” In addition, there are calls for outright taxes on wealth and movement towards a cashless society in which all money would be electronic. In his recent speech before the IMF, Lawrence Summers stated that electronic money would “make it impossible to hoard money outside the bank, allowing the Fed to cut interest rates to below zero, spurring people to spend more.” Cash and securities within banking and securities institutions are visible forms of wealth. Liquid private wealth captured in electronic form offers endless possibilities for wealth redistribution and other social engineering schemes. Tangible assets that are not securitized or digitized are less visible and therefore less vulnerable to broad edicts targeting private wealth.
The same Mr. Mikhailovich notes that during the financial crisis of 2008, public policy was mostly an ad hoc reaction to a cascade of emergencies. Since then, policy makers have had plenty of time to plan orchestrated responses to circumstances similar or worse. In a series of steps, many small and some large, almost always cloaked in complexity and obscurity, and always in the name of public interest or national security, policy makers have constructed mechanisms that are substantially and substantively unfriendly to private wealth:

Source: TBR

 

Western investors seem to view gold only as a directional bet based on considerations ranging from micro economic (supply and demand) to macroeconomic (money debasement, fiscal disorder etc.) In our opinion, this view only partially explains what drives long term gold demand. We have always thought that the larger and more encompassing driver was wealth preservation. Gold is insurance against unforeseen events. It is the one tangible asset that is both truly liquid and that can most reliably provide buying power during times of crisis. In this context, the idea of selling it for a “profit” seems absurd. Physical gold is a reserve of liquidity, and it seems inappropriate to think of it as a way to buy a container of milk or a gallon of gas under emergency conditions. For notional apocalyptic purposes, a carton of Marlboros or case of Glenfiddich is better suited than ingots or coins to pacify the hordes of barbarians at one’s doorstep. However, for preservation of large scale wealth over generations there is no substitute. Gold does what expensive homes, crates of Picassos, safe deposit boxes packed with Rolexes, or a garage full of Aston Martin DB 7’s cannot…..morph quickly and easily into liquid buying power, with no haircut, when it matters the most.

Paper claims on gold will always serve well for trading/ gambling purposes. For those who wish to make directional bets on the future gold price, bullish or otherwise, futures contracts, ETP’s, or other paper derivatives, there is no need to hold physical gold. In fact, one could categorically state that physical gold is not for traders. However, time and again throughout history, usually over a weekend, paper claims have been rendered non-functional, useless or worthless. Banks may shut down, securities exchanges may stop trading, wire transfers may be blocked, arrangements may be suspended, or laws may change. The rhyming of history is not limited to far away places such as Cyprus, Poland, or Ireland. Recall the words of President Nixon (Sunday, August 15, 1971):

In recent weeks, the speculators have been waging an all-out war on the American dollar….I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold….Let me lay to rest the bugaboo of what is called devaluation.

An article in The Wall Street Journal Op Ed piece on 11/29/13, Romain Hatchuel wrote: “From New York to London, Paris and beyond, powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.” The two year long decline in the gold price has been largely explained in terms of the likelihood of Fed tapering and by inference the return to normal economic conditions for the global economy. Nothing could be further off the mark, in our opinion. It seems to us that the decline, initially a reaction to an overbought spike hyped by headlines of a government shutdown in August of 2011, gained momentum as macro traders saw selling and shorting gold as a vehicle to express views on tapering, Fed policy, jobs reports, and the health of the US economy. It makes perfect sense that confidence in the restoration of normalcy in monetary policy would be bad for gold. It appears to us that the pressure on gold is part of a vast macro trade involving the dollar, interest rates and stocks, with a script that seems to rely in part on encouragement from the official sector and in part on pure fantasy. As the short game gathered momentum, vested interests in lower gold prices have become powerful and entrenched.

The money printing thesis has been supportive of almost every tangible asset deemed to be of limited supply except for gold, a glaring exception. The explanation for the incongruity, in our opinion, is warp speed rehypothecation via the shadow banking system of the murky pool of London’s unallocated gold to create artificial supply of this scarce asset. The murky pool which is the foundation for this trade is draining, perhaps quickly, while the party goes on for the gold bears. The set up for a short squeeze of this overcrowded trade and market reversal seems compelling. Catalysts are awaited and as yet unknown, but in our opinion, it will not take much of a spark to inflict serious damage. A reversal will lift not only the gold price but that of the beleaguered gold mining sector where substantive and positive change has been occurring unnoticed by most investors.

In the financial markets, a person that is one step ahead of the crowd is considered a genius, but two steps ahead, a crackpot. Call us the latter, or just resolute, but we hereby go on record as downgrading the sovereign debt of all democracies to junk status. It seems to us that restoration of sustainable fiscal order remains a long shot and that money printing, thought by most to be only an emergency measure, will become the norm. Our negative view on the prospects for fiat currency has not been invalidated by the steep two year decline in gold price. When the market reverses, the diminished physical anchor to paper claims, concerns over title and encumbrances on central bank bullion, and worries over the drift of public policy will drive liquid capital into gold. However, this time around, it seems to us that the major recipient of flows will be the physical metal itself. Holders of paper claims to gold will receive polite and apologetic letters from intermediaries offering to settle in cash at prices well below the physical market. To those who wish to hold their wealth exclusively in paper assets, implicitly trusting the policy elites to resurrect normally functioning capital markets and economic conditions, we say good luck. For those who harbor doubts on such an outcome, we say get physical.

Best regards,

John Hathaway

Portfolio Manager and Senior Managing Director
December 12, 2013
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