Wed Post#2: Wild day for Gold, Silver and revelations in US Treasury's

So after wild gains yesterday - particularly in Silver), both Silver and Gold plunged dramatically today. Silver was down over $2 per ounce while Gold dropped over $100 intraday.

Algo driven liquidations followed Ben Bernanke's testimony before congress as he implied that QE3 is off for now. As the cascading price triggered the $1700 sell limits, Gold fell all the way to $1685 then reversed back over $1700.

The fundamental elements driving Gold/Silver remain the same and I note that even more dats is coming out confirming China's move away from the US Dollar.

Today the US Treasury department released its adjustment to foreign purchases of US Treasury bond holdings.  This bi-annual exercise updates the monthly reports.

A great many naysayers have been expecting the revision to show that China has in fact been building up its US Treasury stake (following the now traditional transfer of UK purchases to China), contrary to the reports that they have been dumping those Treasurys.

The reality is that China has indeed been dumping its US exposure.

China sold over $100 billion in Treasurys in December alone (bringing its total to $1152 billion,down 12% from its June total of $1307 billion.

This means the US will be forced to rely ever more on domestically funded purchases of USTs... which means Primary Dealers and the Federal Reserve.

The biggest surprise from the data is that, contrary to previous speculation, Russia has not been dumping its Treasurys.

In fact the country's holding of $150 billion are the same as they were back in June, and over $60 billion more compared to the pre-revised number.

The key element here is that unless the US finds substitute demand for it's Treasurys, the only remaining buyer will be the entity that already has the largest holding of US paper - the US Federal Reserve.

The American's are monetizing their debt.

How much longer before other nations start to follow China's lead?

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Stop children, what's that sound?... everyone look what's going down.

Back in June of 2011 I posted about the fact that the rush out of US Treasury's was intensifying with confirmation that Russia was dumping Treasury's.  This had come on the heels of a previous post in May 2011 which outlined how China was proposing to dump $2 Trillion of US Treasury's.

Last month we asked if a US dollar dump was underway. 

The thrust of that January post was that observers of the Federal Reserve's Custodial Treasury account had noted that there has been a continued, weekly selloff of US Treasury's going on.

The start of the New Year had brought six consecutive weeks in which foreigners had sold off government bonds, a sequential time period of selloffs which has been greater than ever before... meaning that someone, somewhere was very displeased with US paper.

Today the blog Zero Hedge follows up on this issue by noting that the latest Federal Reserve Custodial Treasury Report is out and the sell off continues.

Russia is now in it's 14th consecutive month of Treasury dumping as it's total US Treasury holdings declined to a fresh multi-year low of $88.4 billion. This is half of the $176 billion they held in October 2010.

Meanwhile the dumping of US paper by China also continues. China sold $32 billion in US bonds in December, bringing its total to a new post 2010 low of $1100.7 billion. 

The vastness of US dollar debt issued in Treasury's tends to dwarf the significance of all this. In December the grand total of US Treasury holding by foreigners declined from $4.75 Trillion to $4.732 Trillion. But don't be fooled... it is a significant amount and the clear pattern of the gradual selloff is now unmistakeable.

More importantly, as Zero Hedge notes, ask yourself the crucial question: "just what are China and Russia buying (ahem stockpiling) with all the dollars that are not recycled back into Treasurys?"

Does it take a rocket scientist to see what is going on? (Non-rocket scientist's can click here, here and here).

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Epic? (updated)

The big news today is rampant rumours of an impending Greek default and it has some speculating that the big day may come as soon as September 20th.

The thinking is that Greece has two big bonds with coupon payments due that day totalling 769 Million Euro. So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it.

Then there is the US Federal Reserve.

The Fed has their rare 2 day FOMC meeting starting on September 20th.

Maybe the fact these two events fall on the same day is a coincidence, but what better way to be prepared for new emergency policies than to have to act on a Greek default?

Speaking of FED rumours, financial analyst David Rosenberg has been speculating that the outcome of the FOMC meeting could produce stimulus far greater than what anyone is expecting.  "If Bernanke wants to juice the stock market, then he must do something to surprise the market. 'Operation Twist' is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires."

All of this is clearly spooking China.

As Ambrose Evans-Pritchard notes in The Telegraph, a key rate setter for China's central bank let slip that Beijing aims to run down its portfolio of US debt as soon as safely possible.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way. Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.

This appears to be the  first time that a top adviser to China's central bank has uttered the word "liquidate" in relation to US Treasuries. Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets – chiefly AAA euro debt from Germany, France. 

And what size of a 'liquidation' are we talking about?

It is estimated that over $2.2 trillion US Dollars is held by SAFE (State Administration of Foreign Exchange), the bank's FX arm. 

Finally, the last tidbit in the rumour mill for today focuses on the infamous JP Morgan.

As we posted yesterday, a detailed class-action lawsuit has been publicly released on the silver price manipulation activities by JPM. The suit outlines exactly how JP Morgan has been conducting it's manipulation including specific names and titles of those JPM employees involved.

But the rumours focus, not on the Silver manipulation lawsuit, but on JPM's outstanding derivative position.

As faithful readers probably already know, JP Morgan is sitting on a $80 trillion plus derivatives monster.

Derivatives are securities whose value depends on the values of other basic underlying securities. Derivatives have exploded in use over the past two decades. They include such well known instruments as futures and options which are actively traded on numerous exchanges and as well numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity derivatives.

And as noted at the end of this 2009 Business Week article, JP Morgan has the face-value equivalent of a mind-boggling $87 trillion in derivatives on its books.

Although your dutiful scribe cannot confirm it with a credible citation, the chatter is that if the price of Silver remains above $36 per ounce by mid/late October, the first of JPM's derivative bombs will denonate in their faces.

October always seems to be a volitle month in the world of global finance.

But if even only one of these stories plays itself out, October 2011 could be an epic month for the ages.

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Update

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Former U.K. Prime Minister Gordon Brown is speaking at the World Economic Forum in the Chinese port city of Dalian today and his candor is nothing short of astounding.

• "European banks are grossly under-capitalized and the debt crisis is more serious for the region than the 2008 meltdown as governments are constrained by fiscal pressures. In 2008, governments could intervene to sort out the problems of banks. In 2011, banks have problems, but so too do governments."

That, in a nutshell, says it all.

But Brown went on and noted that while the ECB is part of the short-term solution, it needs additional assistance. The European Financial Stabilization Mechanism, which is run by the European Union’s 27-nation executive arm, is “not enough.”. “Substantially more resources” are required.

• “The euro area problem is now moving to the center. The euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are, I think, at an hour to midnight in the way that we look at this issue.”

A debt problem cannot be resolved with the creation of more debt, which is what authorities have been trying to do. 

• “European banks as a whole are grossly under-capitalized. We’ve now got the interplay between banks that are not properly capitalized and sovereign debt problems that have arisen partly because we’ve socialized or accepted responsibility for the banks’ liabilities.”

Do you think you will ever hear such candor from the likes of US Federal Reserve Chairman Ben Bernnake?

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Some Sunday musings

A few random thoughts first thing this Sunday morning.

Yesterday we noted how the chief economist for RBC Global Asset Management, Eric Lascelles, argued that by the time many current mortgage holders renew their mortgage that the impact of higher interest rates will be mitigated by three years of rising household incomes.

It is fitting that on the day his comments were covered that shocking GDP figures were released showing that Canada's gross domestic product unexpectedly fell by 0.3 percent in May and that the U.S. economy grew at a meager 1.3 percent in the second quarter.

More importantly growth for the first quarter was revised sharply lower.

And just as data from the first quarter in the US was 'revised' lower, analysts are already looking at the second quarter data and figure that it's not accurate either and will be downgraded as well.

• "Just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions."

So much for three years of rising household incomes.

Speaking of conditions stagnating, former Chinese central bank adviser Yu Yongding repeated his call for China to reduce its Treasury holdings as the American debate about the debt limit drags on. Speaking to reporters at a briefing in Mumbai on Friday Yu said:

• “U.S. bonds are not safe, but people think they are safe. That is a mirage.”

In March, Yu said that China, the biggest foreign holder of Treasuries with $1.16 trillion of the securities, should halt purchases because of the risk of an eventual default. In June, he predicted that credit agencies would limit the severity of any downgrade of the U.S. rating to avoid investor panic.

As China, Russia, Japan et al slow their purchases of US Treasuries, the US Federal Reserve will have no choice but to launch some form of QE3 to monetize the US debt. Increasingly the US economy (and by extension: Canada's economy) look to be entering the same decade plus malaise that Japan is dealing with.

There was an excellent analogy offered in the comments section over at Vancouver Condo Info yesterday about the actions our governement took during the first phase of the financial crisis (2008-2011):

• "The low emergency rates were supposed to be used as a spare tire, while the regular tire was to get fixed. But they couldn’t afford the repair, and could not buy a new tire as the credit card was maxed, so they ran the spare tire so long the tread is worn and can’t get any traction."

The economy has stalled and conditions are not improving. As the real estate market turns, the impact on Lower Mainland homeowners with high mortgages is going to be severe.

Our friends over on VREAA documented a poignant comment yesterday which represents the situation shared by many who have bought in the last five years in the Lower Mainland.  Calling into the Bill Good radio show, a caller said:

• “I work long hours to be able to pay for a house. I drive long distances to get to and from work. I barely do anything in my expensive house other than sleep and go back to work each day. And on top of that [speaking about the upcoming additional gas tax] every time I turn around I’m being taxed for something else.”

Bill Good replied that he thought the caller was "speaking for thousands of people right now.”

Indeed he is.

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