Wednesday, August 31, 2011

Wed Post #2: Another R/E Bubble Warning

We last heard from Capital Economics (CE) back in June 2011.

 They are an economic think tank founded in 1999 to provide "independent macro economic research in the US, Canada, Europe, Asia, Latin America, the Middle East and the UK, on the property sector", had concluded that Canada's housing market was in a bubble that's set to burst.

They say housing prices could plunge by as much as 25%.
  • “Housing valuations have lost all touch with fundamentals and household debt is at a record high. Canadian house prices are overvalued at close to the excessive levels seen in the frothy U.S. market at its 2006 peak.”
Two months later the group continues to pump the same message.  The Globe and Mail put out an interesting chart on Monday by the group which shows 'house price to income per capita'. As you can see we are nearing the same levels the Americans had just before their crash took hold (click to enlarge):

CE notes that our current boom has produced the largest increase ever seen in Canadian housing prices and has wrenched real estate out of its usual alignment to people’s income and concludes that all signs increasingly point to a housing bubble.

“The stories we hear about people buying homes to rent out as investment properties, and others buying homes fearing that if they wait they will be priced out of the market, only convince us even more,” CE's David Madani (pictured above) writes in a research note.

Madani restates the same concerns as those articulated in June.  Mass psychology – “animal spirits” – have driven housing prices to unsustainable levels and that it can only lead to a collapse of at least 25% over the next few years.

In the short term, Mr. Madani sees any further gains as modest. “Housing affordability is already stretched, with costs accounting for a very large share of household income, over 40 per cent according to some estimates.”

Olympic Village - Millennium Water

Speaking of bubbles and a declining market, have you seen the latest bit of promotional desperation over at the former Olympic Village (now Millennium Water)?

Our friends over at Vancouver Condo Info are reporting today on the latest from the sales team team at Rennie Marketing,

The website hails: "We’re kicking off a brand new promotion tomorrow—an amazing move-in package of essentials for every buyer—it’s everything you’ll need for life at The Village!"

And almost as if you are watching a Ron Popeil commerical, the list of goodies carries on missing only Popeil's trademark "but that's not all... you will also receive..."

The package includes:
  • A hybrid bicycle – for your 5KM ride along the seawall to Stanley Park
  • A portable BBQ – for Saturday’s BBQ with the in-law’s, on your balcony or at Hinge Park
  • A one-year Aquabus ferry pass – for a last minute trip to Granville Island or Yaletown
  • A single person kayak – get to know the neighbourhood sea life
  • A year’s worth of one-zone Translink FareCards – the skytrain is only 5 minutes away
  • A coffee per day for a year at Terra Breads Café – just downstairs
  • A pair of running shoes – run the seawall in style
  • A year’s worth of groceries from Urban Fare – an elevator ride away
  • A year’s membership to Modo Car Co-op – for your day trip to Seattle
  • A set of All-Clad cookware – for your Miele kitchen

I wonder if Rennie could get Weird Al to redo his Popeil song for him?  "Now how much would you pay?"

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When life hands you lemons...

For those who do follow Silver, one of the most frustrating elements over the past year and a half has been the disappointing performance of shares in Silver mining companies.

While Silver rose from $15 to almost $50, mining shares have (for the most part) not performed quite as well.

Interestingly it is not just the spot price of Silver on the COMEX that is heavily shorted by the banking cartel to support the US dollar.  Mining shares also receive the same treatment.

And mining company CEO's are showing signs of signifcant frustration with the practice.

Last week the Globe and Mail reported that the management of Silvercorp Metals (TSX:SVM) recognizes the blatent short manipulation going on with their stock and they plan to take action by buying up their own stock and cancelling the shares.
  • "The Company is purchasing its own shares because it believes that prevailing market conditions have resulted in Silvercorp's shares being undervalued relative to the immediate and long term value of Silvercorp's portfolio of producing and development properties in China and Canada. The Company notes that the short interest position in its common shares has climbed from 3.6 million as of July 29, 2011 settlement date to 9.6 million as of August 15, 2011 settlement date, the most recent date for which short interest data is known by the Company. Under the existing NCIB the Company intends to acquire up to 10 million common shares. All common shares purchased under the NCIB will be cancelled."
Yesterday the well established Pan American Silver Corp. (TSX: PAA.TO) came out with a similar announcement.
  • "Pan American is undertaking the Bid because, in the opinion of its board of directors, the market price of its common shares, from time to time, may not fully reflect the underlying value of its mining operations, properties and future growth prospects. The Company believes that in such circumstances, the outstanding common shares represent an appealing investment for Pan American since a portion of the Company's excess cash generated on an annual basis can be invested for an attractive risk adjusted return on capital through the Bid."
The CEO's of these corporations are saying that they have had enough and are starting to fight back.  They are basically telling the manipulators that they are preparing to eat up their own shares until they squeeze the shorts like lemons in a juice press.

This represents a non-conspiratory side to the naked short selling argument for you.

Yesterday Ted Butler laid out for you that conditions are mounting for a significant 'Silver Accident'.

And now the mining companies are adding another element to that equation.

The writing is on the wall.

It is only a matter of time before the manipulated paper game hits the wall.

And when it does, Silver is going to move parabolically truly making it the manifestation of what Eric Sprott called the Opportunity of the Decade.

Lemonade anyone?

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Tuesday, August 30, 2011

Tues Post #2: More signs Australia Housing is T/U

Over on Business Insider, we are offered another look at how the Australia Housing Bubble has begun it's decline in earnest.

The much-hyped “Flip that House” program The Block held a nationally televised auction to sell four houses. In the program couples purchase a house, renovate it, and then try to 'flip' it for a profit.

And as a 400 person live audience watched (and over 3 million  tuned in on TV), only 3 of the 4 properties available in the auction actually sold. As the Sydney Morning Hearld newspaper observed:
  • "Whatever the lure of a celebrity house, the would-be buyers in Fitzroy Town Hall were just as jittery as the would-be buyers at any other auction in recent weeks. "
The remaining three properties sold in the week after the failed auction, but at a substantial loss compared to the initial purchase prices plus the sums expended on them by the 4 couples in their 2 months of televised renovations (not to mention the advertising budget).

Naturally there are those who don't see the fate of these flippers as a sign that the in the Australian housing market bubble is bursting.

In Australia's online Business Spectator, readers are told that the median forecast of the “21 leading market economists” polled was for 5% growth in nominal Australian house prices per annum for the next ten years. 

The column's author notes this would suggest “that [housing prices] will likely be 55% higher in 10 years’ time”.

Good luck with that. As the Business Insider observes they expect a fall in house prices of about 40% over the same time period.

And the reason for the difference? The role of debt in driving house prices.

B.I argues that debt drove prices up over the last 15 years, and now debt will drive them down again.
  • "The mechanism is simple - but it’s not part of conventional “Neoclassical” economics, which is why [the] surveyed market economists don’t consider it. Aggregate demand is the sum of income plus the change in debt, and this is spent this is spent on both goods and services and assets. There is thus a link between the change in debt and the level of asset prices."
We continue to watch the events in the Land of Oz as a harbinger of what is to come here.

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The Silver Accident?

Hi Gang.

Been away from the blogging computer for a couple of days but am back at it today with a lengthy post about Silver.

We left things off on Friday noting how the much anticipated meeting of the Federal Open Market Committee (FMOC) put off a lengthy discussion of the easing options available to the US Federal Reserve until the next FMOC meeting late next month.

Today the highly influential Goldman Sachs is making policy recommendations for the Fed and noted that: "There are three main ways in which the Fed could be more radical: (1) an extension of the QE program into markets other than Treasuries and agency MBS, e.g., private sector securities, (2) a much bigger QE program, up to the extreme version of a promise to buy as many securities as needed to hit a specific yield target (i.e. a "rate cap" further out on the yield curve as then-Governor Bernanke suggested back in 2002), and (3) an explicit or implicit change in the Fed's policy targets."

Combine that with the Chicago Federal Reserve Bank president Charles Evans stating on CNBC that he would be in favor of more easing, and saying he believes in "room for accommodation" and that we "still need to do more on monetary policy" and speculation on QE 3 is now running rampant.

This news sent Gold spiking up $40 within an hour, back to the mid $1,800's.

(Note: Friday is the non-farm payrolls report and heavy shorting of both Silver and Gold is expected Wednesday/Thursday)

For those fans of Silver, the past few months have been somewhat frustrating.  While back above the $40/ounce mark ($41.51 when this was written), Silver seems to have languished since the May beatdown in comparison to Gold.

But there are many who believe Silver is now setting up for a huge breakout as the stage is set for what trader's call 'a Silver Accident'.

An 'accident' occurs when some sort of event (like a financial meltdown or a currency crash) suddenly drive the price of an item exponentially higher.

When these events happen in commodities, world governments often move to flood the market with reserves of that commodity to extinguish a price explosion.

Theodore Butler is recognized as one of the foremost silver analysts and he took a close look at the developing conditions around Silver this week.

He believes all the pieces are now in place for a significant Silver Accident.

More importantly, because world governments have already sold their Silver reserves into the market (and ended holding Silver as a reserve asset) they do not own enough silver to quell a price explosion.

Here are his thoughts for your consideration...


The Biggest Factor in the Future Price of Silver

By Theodore Butler

The primary factors mandating a silver accident are excessive naked short selling and leasing. Silver has the largest short position that’s ever existed in anything. This is the key component to the coming silver accident. The total naked short position in silver measures into the billions of ounces and towers over real world supplies. This combined short position includes the COMEX, all other exchanges, forward selling and leasing, the cumulative issuance of unbacked silver bank certificates, unallocated storage programs and pool accounts. No other commodity has such a huge naked short position.

It is, basically, this bloated short position that’s at the heart of the coming silver accident. It is this same excessive short position that guarantees a financial windfall for your family. A naked short sale is the sale of something you don’t own. While common in financial markets, more than 99% of the world’s population will never sell short anything in their lifetimes. That’s because it’s an unusual and unnatural financial transaction.

Unbridled short selling can artificially depress the price. That is why we have restrictions on short selling that date back to the great stock market crash of 1929. In commodities, there must be a short for every long on every futures contract. Regulations are supposed to preclude excessive long and short speculation via speculative position limits, but these regulations have been abandoned in COMEX silver, despite the efforts of many of us to correct that.

There is one other aspect about short selling that is important to grasp. Whereas the word “sale” means closure or finality in all the billions of daily world business and financial transactions, a short sale is always an open or incomplete transaction. A normal sale marks the end of a transaction. A short sale makes the beginning of a transaction. A short sale must be completed at some point, in some way. There is no exception to this rule. Either the short sale is repurchased and closed out, or that which has been sold short is actually delivered and the open short sale is closed.

Precisely because all short sales must be closed out guarantees a silver accident. When I say that silver has the largest short position in history, I am also saying that silver has the largest number of incomplete transactions in history. Forget, for the moment, the manipulative and depressing effect this monumental short position has had on the price.

All short sales must be closed out in someway. With silver, could it be by delivering silver? Against the billions of ounces of silver sold short, how much do we have to deliver to close out these incomplete transactions? In the COMEX

That’s why I’ve made such a big deal about the uniqueness of a silver short position that’s larger than existing world inventories. It eliminates one of the only two legitimate ways in which a short sale can be closed out. That’s why we’ve never seen any other commodity with a short position greater than what actually exists. How can you have a short position in anything greater than what actually exists?

The only remaining legitimate way a silver short position can be closed out is if it were bought back by the short sellers. From whom are these short sellers going to buy hundreds of millions and billions of silver ounces from? Or more correctly, at what price? Since actual delivery is out of the question, the only way the short sellers can buy back their bloated silver short position is to get every owner of real silver and every owner of paper silver to sell out. The price that would be necessary to accomplish that feat would qualify in any reasonable definition as an accident.

While there is no way to determine when the silver shorts will spook and rush to cover, time is not on the shorts’ side. They must try, at some point, to buy back and cover the silver they can’t possibly deliver. It is not important to know in advance what the actual trigger for the silver accident will be. All you need know is that with the critical and long-term physical deficit in silver, the short selling charade must end. Since we can’t determine when, don’t focus on the timing, focus on the inevitability of a delivery crunch.

From 2000 to 2004, the silver price averaged between four and five dollars. Since then, the silver price has been six, seven or eight dollars. Does this increase mean that the price has finally responded to the law of supply and demand, and therefore eliminated the chance of a silver accident?

Normally, a price increase of 50% or 100% in a commodity should be sufficient to balance any consumption deficit. That’s a big move in any commodity. But not for silver. That’s because the consumption deficit in silver is unlike any other commodity deficit. Silver has been in a structural deficit stretching back for more than a half-century. You don’t undo the damage of 60 years with a 50% or 100% gain.

There is zero evidence that production or consumption has been impacted by the price, or that the silver deficit has been cured. There has been no worldwide rush to find new silver mines in response to higher prices. Silver may have increased in price, but there has been zero effect on near-term production increases or substitutions in demand. No one has switched to gold or platinum jewelry because silver is up in price. The law of supply and demand hasn’t been affected one bit as a result of the recent price increases. The first prerequisite for the coming silver accident is very much intact. However, it takes more than a bullish supply and demand equation to cause a violent price event. Bullish fundamentals point to higher prices but not necessarily a price accident. In the silver short position, we have the needed reason, in spades, for an accident.

As a result of the 60-year structural deficit, we have exhausted just about all the world’s previously existing silver inventory. That includes just about all world governments’ silver inventory. When the unavoidable silver accident occurs, there will be no one to douse the price fire. This can’t be said about any other commodity.

This fact distinguishes between a gold and a silver accident. In gold, in a financial meltdown or currency crash (popular reasons given for a gold price accident), world governments own enough gold to extinguish a price explosion. In silver, they don’t own enough silver to put out a fire.

It’s rare to be presented with an unavoidable financial accident that you can personally benefit from. If you find my argument has merit, then position yourself in silver before the coming accident. If you wait until the accident happens, it will be too late.

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Friday, August 26, 2011

Friday Post #2: Much ado about nothing?

The much anticipated meeting of the Federal Open Market Committee (FMOC)  put off a lengthy discussion of the easing options available to the US Federal Reserve until the next FMOC meeting late next month.

“The Fed has a range of tools that could be used to provide additional monetary stimulus,” Chairman Ben Bernanke said.

These options were discussed in August and “we will continue to consider these and other pertinent our meeting in September.”

Bernanke announced that the Fed had decided to expand its September meeting to two days – Sept. 20 and 21 – to review the pros and cons of further easing. 

“The Fed is not prepared to act at this point, but kept a bias to ease in place,” said Peter Hooper, chief economist at Deutsche Bank.  

Many Fed watchers had expected at least a discussion of the options in today’s speech. Financial markets have been waiting for the speech to hear Bernake’s views on whether he thinks the economy will avoid a double-dip recession and what steps he might be willing to take to stave off a possible severe downturn.

But Bernanke refrained, saying it was unclear how recent stock market weakness, debt-ceiling negotiations and the European debt crisis had impacted the economy.

“It is difficult to judge by how much these developments have affected economic activity thus far, but it seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth,” Bernanke said.

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- From this week's Economist Magazine, click on image to enlarge. (hat tip BW)

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Thursday, August 25, 2011

Thurs Post #3: Interesting rumour about Silver

There is a rumour circulating on the yahoo chat boards which is intriguing enought that it is worth posting.

But let's be clear... at the moment it is just a rumour.

Faithful readers will recall that when Silver shot from $18 to almost $50 in late 2010/early 2011, the surge was propelled by a short squeeze on Silver.

While the squeeze was occuring, the Silver community was divided as to the legitimacy of  a group of ex-JP Morgan traders fired by Blythe Masters in July of 2010 who were supposedly leading the short squeeze charge.

Known as the 'Wynter Benton group', they were supposedly looking to wreck havoc on JPM using their own naked silver shorts.

Messages they posted were routed through the yahoo chat boards and many of those messages proved to be very accurate about the squeeze occuring in the Silver community.

After a few months off the radar screen, the group has resurfaced making a claim which, if true, would be a dramatic game changer.

The 'group' is now alleging that a major sovereign central bank has been accumulating physical silver as a reserve asset and will soon publicly announce this fact.

That 'major sovereign central bank' is clearly China.

There is precedent for such a steath shocker of a move.

Back in April of 2009, China revealed a stunning rise in it's gold reserves.

Hu Xiaolian, head of China's secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

China had quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal.  This stunning move caught the world off guard. No one had been aware that China had been accumulating so much Gold to add as a reserve asset.

The very next year, when statistics were released in 2010, China revealed it had gone from exporting 100 million oz of silver a year in 2007 to IMPORTING 100 million oz in 2010.

If China does now make an official announcement that it is accumulating that Silver as a 'reserve asset', Silver will surge massively in value.

Even if it isn't true, the rumour value alone could have a strong influence on markets.

We do live in interesting times.

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Thurs Post #2: Alan Greenspan says "Gold is not in a bubble"

For all those who believe that Gold/Silver are wise investments, scorn is endlessly heaped upon them.

Called a 'barbarious relic' that doesn't generate dividends, the metals are always denigrated as an investment vehicle or as a currency. 

Which is why this bloomberg story caught my eye.

In a week where gold hit a record above $1,900 an ounce, Allan Greenspan came out with a shocking statment. The former chairman of the US Federal Reserve (1987 to 2006) said today that he did not think gold was in a bubble.
  • “Gold, unlike all other commodities, is a currency. And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.” 
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Tomorrow's Jackson Hole Speech

The financial world eagerly awaits Ben Bernanke, the Federal Reserve's chairman, when he speaks Friday at the Fed's annual symposium in Jackson Hole, Wyoming.

We first made this post back on July 13th, 2011 and we are reprinting it today.

Whether the Federal Reserve likes it or not, its unprecedented monetary polices over the last few years have conditioned the financial markets to expect a helping hand when the going gets tough.

With the stock market mired in a month-long slump and both the U.S. and euro zone economies in danger of sliding into recession, investors are bracing for a possible repeat of last year's performance, when Bernanke hinted the Fed would act if conditions deteriorated.

Two months later, the central bank began pumping $600 billion into the financial system through direct purchases of Treasury debt, a second round of stimulus that markets dubbed "QE2."

So there has been considerable debate about whether or not there will be a third round of Quantitative Easing by the US Federal Reserve.

Back in July US Federal Reserve Chairman Ben Bernanke appeared before Congress and here is how the appearance was reported:
  • While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, "thereby putting downward pressure on short-term rates more generally." Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten.
You get a sense of how desperate things are getting when Bernanke starts talking about "several untested means to stimulate growth."

This phrase is important as it hearlds what is coming.

The weakening economy and upward pressure on interest rates due to oversupply will cause further Fed intervention, even if it isn’t called QE3.

At his post-Federal Open Market Committee (FOMC) press briefing in July, Bernanke indicated that if job growth falls below 80,000 per month, the Fed would likely intervene again. Well... job growth has now been below 80,000 for three consecutive months.

So what will Bernanke do?

Back in July Forbes took a look back at some of Bernanke's speeches and believes they have pieced together what is coming.

On November 21, 2002, Ben Bernanke gave a talk before the National Economists Club of Washington, D.C. entitled ‘Deflation: Making Sure ‘It’ Doesn’t Happen Here’.

In that 2002 talk, Bernanke ostensibly outlined all of the tools available to the Fed if the overnight (Fed Funds) rate hit zero. At the time of the speech, deflation wasn’t expected in the foreseeable future, so he would have no reason not to outline all the tools he could think of. Here are the 7 options Bernanke suggested and a look at each one:
  • #1: Expand the scale of asset purchases;
  • #2: Expand the menu of assets the Fed buys.
Both QE1 and QE2 used these tools. In QE1, the Fed purchased non-traditional assets for its portfolio, including mortgage backed securities (MBS) and derivatives. In both QE1 and QE2, the “scale” of asset purchases was dramatically increased.
  • #3: A commitment to holding the overnight rate at zero for some specified period.
This tool is currently in practice with the Fed’s “extended period” language in the Federal Open Market Committee (FOMC) minutes.
  • #4: Announcement of explicit ceilings on longer-maturity Treasury debt.
This isn’t new. The Fed did this in the 1940s and a version of it again in the 1960s. During a period of approximately 10 years ending with the Federal Reserve-Treasury Accord of 1951, the Fed “pegged” the long-term Treasury bond yield at 2.5%. And, during the Kennedy Administration, the Fed sold T-bills and purchased an equal amount of longer dated T-Notes in order to reduce long-term rates. Bernanke believes that the announced policy of pegging will cause arbitrageurs to keep yields near the announced peg, especially if the Fed intervenes several times to prove its commitment.
  • #5: Directly influencing the yields on privately issued securities.
Bernanke said, "If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets."  Think GM, Chrysler, AIG.
  • #6: Purchase foreign government debt.
The Fed would do this, Bernanke explains, to influence the market for foreign exchange, i.e., to weaken the dollar. He points to the dollar devaluation of 1933-34 as an “effective weapon against deflation”. “The devaluation and the rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly … The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.” (While this is true, a mere two years later, after the withdrawal of government stimulus, a second severe recession began, one that would last until the U.S. geared up for World War II. And the 1937 slump in stocks was one of the largest on record.)
  • #7: Tax cuts accommodated by a program of open market purchases.
“A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money”, he said in the speech. (Hence his nickname – Helicopter Ben.) The extension of the Bush tax cuts along with the reduction in the social security payroll tax is a recent example of this policy.

These 7 tools are non-traditional, and Bernanke admits that by using them, the Fed “will be operating in less familiar territory” and will “introduce uncertainty in the size and timing of the economy’s response to policy actions”.

Nevertheless, Bernanke says, “a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition … A central bank … retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is zero.”

Today, any objective economist will tell you that, despite all of the monetary and fiscal stimulus, aggregate demand and economic activity has been minimally impacted. At the July post-FOMC press briefing, Bernanke admitted that he has no explanation as to why the economy has remained “soft”. Nevertheless, as stated above, in an election cycle, the Fed would be expected to do “something”.

Of the seven available tools, #1 appears to have been taken off the table, and #3 is presently employed. Tools #5 and #7 have been used, and may be employed again. #5 was heavily used in the financial crisis (GM, Chrysler, AIG), and #7 requires the cooperation of Congress (tax cuts).

The Fed said that it won’t reduce the size of its balance sheet in the near future, holding it steady like a rock, but will invest or roll any maturities or payoffs back into the market. Hence, the Fed has already embarked upon a policy of what we will call Rock ‘N Roll. As part of Rock ‘N Roll, we also expect the Fed to change the composition of its balance sheet to attempt to impact yields on private sector bonds (#5).

Over the past 2 years, Fed actions appear to have had little impact on aggregate demand. In 2002, when he outlined these non-traditional tools, Bernanke said he had no idea of the magnitude of their effectiveness.

Bernanke is now fully into speculation  mode when it comes to trying to 'fix' the economy.

This isn't a man implementing sound economic principles... rather what we now have is a sorcerer's apprentice practicing his craft.

He is experimenting... with no idea of what will - or won't - work.

Last month John Embry, Chief Investment Strategist at Sprott Asset Management, made an astute observation:
  • What’s been fascinating, and what was unappreciated by me in the early stages, was the enormous number of derivatives that have been created in the financial system. Because of the derivatives they’ve been able to keep this thing going for infinitely longer than any rational mind would have thought possible. You’ve been able to create leverage to the extent that you’ve never seen before and this is why I think the bubbles were able to get stretched out and last as long as they did. Because the balloon was blown up so much, I just think the aftermath in its finale is going to be extraordinarily unpleasant.”
Warren Buffet called derivatives "financial weapons of mass destruction" and as the economy continues to unwind, we are seeing just how accurate this description is.

The Federal Reserve has no real game plan for how to deal with it all.

Which is why so many believe the flight to Gold and Silver will only intensify from this point onward.

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Wednesday, August 24, 2011

Wednesday Post #2: Options Expiry Calendar (updated)

It's been a while since we've discussed the manipulations that go on with Silver (and Gold) on the COMEX and newer readers may not be fully aware of some of the times you can expect heavy shorting of the metals.

One of those times is the week before options expiry.

Above is the options calandar for 2011 (click on image to enlarge).  Options for Gold/Silver for September expire on August 25 (tomorrow) which is why the metals have been heavily shorted in the days leading up to expiry.

The next options expiry is on September 27th, which is a Tuesday.  Therefore heavy shorting of Silver/Gold can be expected as early as Thursday of the week before.

Other occasions we see predictable, heavy shorting of the metals is just prior to release of the nonfarm payroll employment numbers.

Nonfarm payroll employment numbers are released monthly by the US Department of Labor as part of a comprehensive report on the state of the US labour market. The US Bureau of Labor Statistics releases preliminary data on the third Friday after the conclusion of the reference week, i.e., the week which includes the 12th of the month, at 8:30 a.m. eastern time; typically this date occurs on the first Friday of the month.

Nonfarm payroll is included in the monthly Employment Situation or informally the jobs report and affects the US dollar, the Foreign exchange market, the bond market, and the stock market.

The shorting of Silver/Gold is done to support the US dollar when these non-farm payroll numbers are released.

Finally... anytime the US Federal Reserve Chairman speaks after a meeting of the FMOC, the metals are usually shorted leading up to his speech.

Two bloggers worth checking out who regularly follow the manipulations of the Gold/Silver markets and provide updates are Ed Steer and Harvey Organ.

From Harvey this evening:
  • The bankers again decided in their great wisdom that a raid was necessary to quell the demand for gold and silver. The world awaits Ben Bernanke's speech from Jackson Hole Wy. The market strongly believes that he will initiate QEIII. If he does not, then markets will tank. The fact that a monster raid on the precious metals with regulatory cover was orchestrated seems to indicate that that is where he is heading. I will deliver to you both sides of the story.

    The price of gold fell by an unbelievable $104.20 to $1751.10 at comex closing time. The silver price was also whacked to the tune of $1.12 to $39.16. Dennis Gartman liquidated another 1/3 of his positions early today along with yesterday's 1/3. I emailed the CFTC that maybe they should arrest Gartman for inside trading as he obviously knew that another raid was forthcoming today. I will remind everyone that you should not play at the comex. If you want gold or silver line up at the bank and get it. Do not play with paper gold or silver as these crooked bankers will fleece you time and time again. Please try not to use leverage as this is a big sin and again the bankers exploit your weaknesses.

    The comex has now decided to raise margin requirements on gold again tonight. It is amazing how this news was leaked. Gold will now become a physical market like silver.
I hope you find the information from these sources helpful. Remember, the funadmental reasons for the influx of money into Gold/Silver are still strong and while the spot price of these metals will fluctuate wildly, their upward price movements will continue significantly. Invest accordingly.

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The attack on Gold mimics May's attack on Silver

As events play out in Gold and Silver, the predictablity of what is occuring is almost comical.

With options expiring this week and Ben Bernanke giving the Federal Reserve's highly anticipated FOMC statements Friday from Jackson Hole, EVERYONE was expecting classic cartel action on both Silver and Gold in the days leading up to Thursday/Friday... and we were not disappointed.

Those who follow the metals have been wondering how long before the same sort of attacks on margins in Gold that Silver saw in May (when margins were hiked 5 times in 8 days to force a selloff).  Even on CNBC last week, Jim Cramer was touting the prospect of margin hikes.

Two weeks ago the CME hiked gold margins by 22%.

Two days ago the Shanghai Gold Exchange jacked their margins by 26%.

This morning Gold plunged by $100/oz, the most since December 2008. Some rationalized that the market was about 24 hours late in processing the news from the Shanghai Gold Exchange hiked gold margins, but in reality the selloff was insiders getting a jump on the next attack.

And that attack is now public after having been widely leaked this morning: the CME has boosted margins in Gold by an additional 27%.

Look for margins to ultimately be raised to 100% cash before things are done. This fast, deep correction is one of the signposts on the way to much, much higher prices for both Gold and Silver.

More importantly look for the blatant and heavy handed bear raids in the metals, although very much anticipated and a source of some profits, to continue.

Remember... nothing has changed in the fundamentals driving both Gold and Silver.

There has never been a time in history when debt problems globally have been this monstrous.  Harry Schultz, the retired but highly respected investor, summed up the calamity we face in his last market newsletter at the start of the year.  He said,  “Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched & where the rot is by far the deepest.”

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Tuesday, August 23, 2011

America's National Debt: Where it originated, who holds it.

This is a great graph showing under which President the massive US debt originated and who currently holds that debt.

All President's prior to Ronald Reagan contibuted only $1 Trillion of the $14.5 Trillion debt. 

Ronald Reagan contributed $1.9 Trillion. George H.W. Bush $1.5 Trillion and Bill Clinton contibuted the lowest of the Presidents since 1980 at $1.4 Trillion.

Then comes George W. Bush with an astonishing $6.1 Trillion!

President Obama is up to $2.4 Trillion and climbing.

When you break it all down, the real problem is that the US has malinvested too much of its revenue in too many fruitless and unfunded projects like wars, overseas military bases, and other subsides to oil companies, banks, and multinational corporations.

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Monday, August 22, 2011

Monday Post #2: Venezuela issues formal request for Gold

According to Bloomberg, the central bank of Venezuela has sent a statement by e-mail requesting its 99 tons of gold holdings from the Bank of England, citing the institution’s president Nelson Merentes.

"We’ve contacted the Bank of England and the corresponding protocols have been initiated to complete this operation as soon as possible,” Merentes said, according to the statement. “Once that’s done, the shipments will begin by sea.”

Chavez ordered the central bank Aug. 17 to repatriate $11 billion of gold reserves held in developed nations’ institutions. Chavez fears 'hostile countries' may seize the national patrimony.

Venezuela holds 211 tons of its 365 tons of gold reserves in U.S., European, Canadian and Swiss Banks.

40 shipments will be needed to carry the 17,000 400oz bars by sea.

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Bedtime Story: Inflation at 2%

Quantitative Easing 2 was supposed to revive the economy.

Declared as a failure, the US Federal Reserve will meet on Tuesday and ponder it's next steps.  Many wonder if the inevitable QE3 will be announced.

In the meantime, let's take a look at what the reality of what has happened since Ben Bernanke announced his QE2 policy in August 2010:
  • Unleaded gas prices are up 45%.
  • Heating oil prices are up 46%.
  • Corn prices are up 71%.
  • Soybean prices are up 26%.
  • Rice prices are up 13%.
  • Pork prices are up 31%.
  • Beef prices are up 25%.
  • Coffee prices are up 38%.
  • Sugar prices are up 48%.
  • Cotton prices are up 13%.
  • Gold prices are up 42%.
  • Silver prices are up 115%.
  • Copper prices are up 23%.
Never mind those figures though... officially the fictional math of the CPI says inflation is only running at 2 - 3%. 

Riiight.  Makes a good bedtime story tho.

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Saturday, August 20, 2011

Sat Post #3: Zero Hedge sparks a debate on Canadian Banks (updated 2)

It would be almost amusing if it weren't such a serious issue.

Thursday we referenced a post on Zero Hedge about Canada's Banks and their Tangible Common Equity (TCE).

This morning we covered an editorial by the Globe and Mail  on the Zero Hedge post (as well as pointing out that Sprott Asset Management made similar points in a 2009 report).

Even Garth Turner joined the Zero Hedge pile on.

Apparently the Globe and Mail made two editorials on the Zero Hedge post... and now Zero Hedge responds.

More as we come across it.  If you see any other articles out there on the Zero Hedge post about Canadian TCE, email them or post links in the comments section.


Canada's Business News Network (BNN) discussed the Zero Hedge post here.

Financial Post: Swap market says Canadian banks super safe (hat tip: rumbleguts)

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Sat. Post #2: The Greatest Trade of All Time

Excellent article from Sprott Asset Management this week that is definately worth reading.

A summary of the article:

On its way to becoming the world’s greatest superpower, the United States pulled off some truly remarkable trades. Two notable transactions come to mind and were both outstanding bargains: 1) The Louisiana Purchase (purchased from the French); 2) Alaska (purchased from the Russians).

For a mere $15 million, America instantly doubled its size with the 1803 purchase of the Louisiana territory. Sixty-fouryears later, oil-and mineral-rich Alaska was obtained for a paltry $7.2 million. 

Even adjusting for inflation, the combined value of these deals in today’s dollars would be very small. However, these two transactions pale in comparison to the greatest trade of all time, one which remains ongoing. This particular trade has allowed the US to exchange more than $8 trillion worth of paper for an unbelievably enormous amount of real goods and services over 36 straight years. We’re referring, of course, to the United States trade deficit.

Imports have exceeded exports every year since 1975. For much of the past decade, America’s annual trade deficit has soared past the $600 billion mark, while the accumulated trade deficit has moved relentlessly higher.

Sprott then goes on to question how long this trade deficit can continue.

We could include countless examples and all of them collectively would not do justice to what an amazing trade this has been for the United States. Stop and think for a moment about how many hours of labour, manufactured goods and non-­renewable resources the United States has been able to acquire over 3.5 decades in exchange for paper promises.

Exporting nations have willingly financed this $8 Trillion trade deficit by accepting US dollar dominated paper promises in exchange for tangible goods sold. But perhaps most important of all, they’ve continued to hold and accumulate these paper promises rather than exchange them for real assets.

Presumably, they have done so on the belief that one day they will be able to convert these paper promises for at least an equivalent value of goods and services. This requires faith that the purchasing power of the US dollar will not decline by more than the returns of their paper promises and that someone in the future will be willing to give up a tangible asset in exchange for them.

We believe that the growing US Budget deficit, the Federal Reserve’s “Quantitative Easing” Program and the ongoing US dollar decline has caused holders of US dollar reserves to question their faith, re-­examine their desire to accumulate additional US dollar reserves and also look to convert their existing US reserves into real goods. Holders of US dollars had the chance to see how the Federal Reserve and the US Government would react to fiscal difficulties and we believe this ‘look behind the curtain’ has permanently altered their faith in US dollar denominated debt and sovereign paper promises, generally.

Foreign investors are not being properly compensated for the risk associated with holding US promises today. We believe they are beginning to realize that this exchange of real goods for paper promises is a
losing trade.

The move to diversify out of US dollar reserves by surplus generating nations may be the trigger that causes a complete revaluation of the risk associated with holding faith-­based assets generally, and we believe that holders of faith-­based will increasingly look to convert them to real assets as quickly as possible.

History has shown us that fiat based currencies always suffer the same fate and eventually become worthless. It is hard to predict exactly when people will awaken from this mass delusion in faith-­based assets. But, it is certain that in these times it is wise to avoid gambling your wealth in faith-­based assets when the system that you must trust has a clear history of being untrustworthy. We therefore advise you to question your faith and know what you own.

Interestingly... this is very similar to what Charles DeGaulle said in 1965.

The full Sprott article is below...


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Sat Post #1: More on Canadian Banking

Thursday's post, Will Canadian Banks will be in the market crosshairs soon?, profiled a chart posted over at Zero Hedge discussing Tangible Common Equity (TCE).

That's the ratio used to determine how much losses a bank can take before shareholder equity is wiped out.

Seems that if you rank global banks by tangible common equity, starting with the lowest first, then 30% of the worst banks in the world are our own Canadian Banks.

Bank TCE ratio
Canadian Imperial Bank of Commerce 2.84%
National Bank of Canada 3.30%
Bank of Nova Scotia 3.37%
Royal Bank of Canada 3.43%
Toronto Dominion Bank 3.60%
Bank of Montreal 4.19%

We have covered this topic before. 

Back in December 2009, we talked about a report from Sprott Asset Management, that analyzed and compared the average leverage ratio of the Canadian banking system.

Sprott saw exactly what Zero Hedge noticed.
  • "Looking at the Canadian system more closely, all five Canadian banks are levered at an average of 31:1, which is actually the lowest leverage ratio during the three years that we reviewed. This implies that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.

    Now, that doesn’t mean they would go bankrupt per se, but it does give us an indication of how little asset prices would have to decline in order to wipe out their tangible common equity. These leverage ratios worry us because they leave such a razor thin margin for error on the ‘tangible asset’ side of the leverage equation."

Sprott and Zero Hedge are thinking alike here.  But the Zero Hedge article came out on a day when the world's stock markets were crashing on concerns of the European Banks. And in a testimony to the growing influence of Zero Hedge, the Globe and Mail newspaper picked up on the story. 

G&M points out that Canadian banks routinely disclose TCE ratios north of 10%.

Why such a huge difference from the Sprott and ZH numbers?

The wide discrepancy is due to the fact that the banks talk about tangible common equity to risk weighted assets.  The Zero Hedge graph is looking at TCE to total assets (which is exactly what Sprott Asset Management did).

The Globe notes that risk weighted assets adjust for the chance that the assets will go bad, and that's hardly a science. Total assets doesn't allow for such judgement calls. On that basis, Canadian banks are just as leveraged as European banks, and far more so than American banks.

So do the concerns that Sprott and Zero Hedge raise mean investors should worry about Canadian Banks or not?
  • "[In Europe], the banks face the very real prospect of losses on the value of the bonds they hold that were issued by countries like Greece, Ireland, Spain and Portugal. Losing 4%of total assets doesn't seem like a stretch.

    In Canada, the concern would have to be the housing portfolios, the biggest chunks of Canadian banks' assets.

    If you believe that housing is in for a severe correction in Canada, and that Canadians won't repay their mortgages when the value of their homes falls, and that the banks will have to take significant write downs on the portions of their mortgage portfolios that are not insured by the federal government, then maybe you will come to the conclusion that [Zero Hedge] is onto something.

    If you are one of those who believes housing can never fall, or if you believe that Canadians will continue to pay their mortgages even in a housing correction, as they have always done in past, then maybe you can breathe a little easier.

Do you get a sense here of just how much of our country's future is wrapped up in our housing bubble?

The bottom line is that if the bubble bursts, what we are watching play out in Europe this week will be repeated here with lightening speed.

And it will be ugly.

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Friday, August 19, 2011

With yesterday's market plunge, does anyone think Gold is at it's top?

So yesterday was another wild day on the worldwide stock markets.

Rumours about European banks were the catalyst.  Two Italian banks, Unicredit, the largest bank in Italy and Intesa bank were both insolvent. Another bank (now known to be Swiss National Bank) went to the ECB for a handout to the tune of 500 million dollars as it could not get funding anywhere.

Whispers that a banking holiday in Europe was close at hand set the global marketss on a free for all slide.

The DOW after being down by over 500 points rallied late in the day to be down only 419 points or 3.68%.

The Nasdaq was down 131 points or 5.22%. The German Dax was down 346 or 5.8%. The FTSE was down 139 points or 4.74%. The French CAC was down 178 points or 5.48%.

And while it may be European Banks as the current concern, it comes on the heels of the US debt crisis.

Recall that it was almost two years ago (November 19th, 2010 to be exact) when this blog commented that, "the current move to gold around the world is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status... we are currently witnessing perhaps the most profound paradigm shift in gold from the patterns seen over the last 20 years. During that time European monetary authorities sold the precious metal and Asian central banks accumulated official reserves in the form of US Treasuries."

At the time that post was written, Gold was sitting at $1,150 per ounce.

Just after midnight this morning (when this post was written) Gold was at $1,857 per ounce.

Is Gold at a top?

I would suggest you take a look at what Central Banks around the world continue to do as your guide.

As reported by Dow Jones Newswires, the demand for Gold by Central Banks quadrupled in the 2nd Quarter of this year. For them Gold at $1650 was a screaming deal:

  • LONDON (Dow Jones)–Central banks are topping up their gold reserves, quadrupling their total purchases from the market in the last quarter as they seek to reduce their dependence on traditional reserve currencies such as the U.S. dollar.

    Even with gold prices at record highs, emerging markets’ central banks have revived the official sector’s gold-buying interest. They are diversifying their foreign exchange reserves, which have grown along with their export industries. More recently, they’ve also bought gold in reaction to the persistent sovereign-debt crises affecting traditional reserve currencies, like the dollar and the euro. Analysts say this trend is likely to continue.

    "We expect to see additional demand support from official-sector purchases as numerous influential countries are becoming bearish on the status of the U.S. dollar as a reserve currency," said analysts at Swiss bank Credit Suisse.

    Central banks bought 69.4 metric tons of gold in the second quarter, more than four times the 14.1 tons reported a year earlier, the World Gold Council said Thursday.

    During the first half of the year, central bank gold purchases totaled 192.3 tons, more than 2 1/2 times the 72.9 tons bought in the first six months of 2010, the council said.
Gold is still cheap because you can bet it hasn't even begun it's ascent. Nor has Silver.

But make no mistake... it will continue to be a wild roller coaster ride involving wild swings.

Expectations are for a significant raid on the paper markets at about 8:00am PST today as this is the Friday before COMEX options expiry and those days the metals are usually targeted for a big hit.

Learn to love these type of days... the metals are on sale when it happens.
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