Thursday, April 25, 2013

Central Banks buying equities: building a house of cards

Perhaps writing about it will help me with the potential consequences of Central Banks loading up on equities.  

As background: a central banks is defined by investopedia as:

The entity responsible for overseeing the monetary system for a nation (or group of nations). Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.

For example, the central bank for the United States is the Federal Reserve.  For Japan it is the Bank of Japan.  For the eurozone countries it is the European Central Bank (ECB).  For the UK it is the Bank of England.  These are the entities that create money out of thin air by 'printing' it.

These countries are all in debt.  How is it that they have excess money to invest in anything?  Presumably, they just printed more in order to invest it.  But, isn't this bad for an economy.  The excess money will be invested in things that are, at best not very productive.  So this money is just inflating the equity markets.  And, when more excess money is not available equity price will return to productive levels.  So the current equity market inflation is temporary, which seems to be the point.  Inflate the stock market long enough to make your millions or serve your term in office and let the next guy deal with the consequences.  And, kick the can down the road.  Some day this road is going to end.

Now let's assume that these countries actually have excess money to invest because they do not need to buy anymore of their government's debt and are not trying to depreciate their currency.  What to do with that excess money?  Invest it in equities!  That way if our industries go in to recession and start to fail, our country will lose a lot of value on its investments at the exact time our country can least afford it.  OK, let's invest it in other countries' companies to diversify.  Sorry that strategy will not help diversify the risk.  The economy and companies are global.  For example, when Apple sales slow it affects suppliers in Asia just as much as Silicon Valley.  And, 61% of Apple sales in FY2012 were international.

This is going to end badly.

Just to make sure: do you realize that if you have a 401k or IRA or pension plan with investments in equities, the value of your retirement assets is currently being inflated by this 'excess' money.  But, don't worry the Fed can always print enough money to keep the Dow around $15,000.  Of course by printing that much money a burger will cost as much as a share of Apple stock when you retire.  And, a prescription will cost . . . . never mind just enjoy your burger.

Central Banks load up on equities.

"Some day this war is going to end."

Sheriff Wanted - no questions asked

Please do not view my post yesterday 'O Hunt Brothers Where Art Thou' as an endorsement of the Hunt brothers and financiers gaming commodity markets to raise costs for the productive economy.  My desire to have fraud in the precious metals markets and everywhere else in our current global financial systems exposed is so strong that it does not matter who or how.  Once the amount of corruption is revealed people might demand, find, and hold accountable leaders who will make systematic changes to prevent the control frauds that 'run' our institutions today.

Seems that we need a good crisis.  Let's not waste the next 'opportunity'.

It will be fascinating to watch the oligarchs start fighting themselves.  They will have to start fighting each other because that's where the money is.  Every day there are fewer 'middle-class' with anything left to appropriate.

Wednesday, April 24, 2013

Oh Hunt Brothers Where Art Thou?

Evidence of precious metal supply shortages in the retail market is bullish for gold and silver.  However, as long as the primary banks can continue to create paper gold and paper silver the market prices for these metals are subject to their whims.  A default on the COMEX or LME will trigger panic for paper holders and finally allow gold and silver to trade at their physical value.  

An exchange will default when a contract or option holder demands the physical metal backing that contract and the exchange is not able to deliver it by loading it on the investors truck.  Historically, contract holders either cash settle by accepting an amount of cash equivalent to the value of the metal backing the contract or they 'roll over' to new contracts with expiration dates further in the future.  No trader and few investors really want to take possession of the physical metal due to the transportation and storage costs.  When the day comes that traders and investors fear that they might be forced to cash settle their precious metal contracts at yesterday's market prices, they will want the physical metal.  The value of precious metals will jump the day of a default because market supply will be revealed to be much less than previously thought.  Many will pretend to be shocked on that day. 

The first investors to demand physical metal may actually receive it, at least until inventory at the exchanges runs out.  Investors realize this and therefore the situation is ripe for a run or stampede.  There is enough uncertainty and control fraud in the financial markets that I would have headed for the exits a long time ago.  In fact, I did.  Unfortunately my holdings are not nearly substantial enough to swing any markets, even highly levered markets.  What will finally trigger a panic at large institutional investors and hedge funds?

There must be some clever investors with billions of dollars tempted to take a large position in physical silver, and some silver forwards or options contracts.  Then when the contracts expire, exercise their option to take physical delivery of the silver.  When the exchange defaults and cannot deliver the silver, and the default is publicised, the paper market will collapse and physical prices will increase which will provide a terrific return on their original investment.  

The silver rather than gold market seems the more attractive market for this strategy since central banks do not buy, sell and store silver to back their governments' currencies.  And, 55% of annual silver demand is for industrial purposes instead of jewelry, photography, silverware, and coin and bars, according to The Silver Institute.  Industrial demand provides a floor on the value of silver.  No one really needs gold for anything except to get away from fiat currencies.

The experience of the billionaire Hunt brothers in 1980 may be dissuading some from trying to expose the exchanges and the paper silver market.  The Hunt brothers effort to corner the silver market was derailed when the COMEX changed the rules and placed new, heavy restrictions on the purchase of silver on margin. Someone is going to try it: George Soros?  John Paulson?  Carlos Slim?   Who will play the leading role in Oh Hunt Brothers Where Art Thou?

Some 'swells' are about to get an 'advance tutorial.  It's all about the money boys!'

UK Royal Mint sales growth 150% this month

Bloomberg Business Week reports that sales of gold coins by the UK Royal Mint are 3 times more than last year.  Or is it last month?  Or both?

Britain’s Royal Mint, established in the 13th century, sold more than three times more gold coins this month than a year earlier as prices declined. 
Sales are more than 150 percent higher than last month, according to Shane Bissett, director of bullion and commemorative coin at the Royal Mint. Gold is down 11 percent this month, heading for the biggest drop since September 2011.

The article is a little confusing because the intro states "three times more gold coins than a year earlier" and the next paragraph says "150 percent higher than last month."  Which is it? from last year or last month?  And, I assume this month means April, which is not over yet.  So, presumably sales growth could be even more at the end of the month.  And what if sales last year or last month were depressed.  Then the growth would be high but it would not be due to current high demand as implied in the article.   It would be helpful if articles like these gave more data.  Regardless, from quotes later in the article it is clear that the UK Royal Mint is experiencing high demand.  

Tuesday, April 23, 2013

Rumor of a bank not allowing a depositor access to his gold

Jim Sinclair reports that a friend of his was denied access to his physical gold in his allocated account at a primary Swiss bank.  The Swiss bank cited a directive from the Swiss Central Bank to limit transactions to less than 200,000 Swiss Francs to prevent money laundering.

Jim Sinclair is a commodities trader and blogger whose writings I have followed for several years.  He has been predicting defaults in the paper gold market for a while now.  Here is a link to his website:

Does the bank have the physical gold?  Is the bank scrambling to get gold now so that they can return it to the depositor?  I hope that Jim and his friend continue to report on their experience.  Has the friend been able to get 200,000 Swiss Francs worth at least?  Has the friend been able to go into the bank's vault and see the gold that is allocated to his account?  Has the friend been able to audit his gold in the vault by validating serial numbers, weighing, ultrasonic testing, etc.

For background: an allocated gold account is an account that belongs 100% to the owner.  The gold may not be pooled or swapped.  In theory there is a shelf in the vault at the bank that contains this depositors gold.  If the bank does not have this depositors gold, the bank must have given it to someone else, which would be criminal.  This experience could create enough doubt in other depositors minds to ignite a vault run on physical gold.  

I certainly would not trust a bank to store my gold.  But, then I do not have many ounces to worry about storing.  If I had a lot of bullion, I would keep much of it in safe deposit boxes at various banks and credit unions.  I would routinely audit amounts entrusted to the bullion vaults at primary banks.  

By the way, if gold ownership is ever made illegal as in the 1930's or heavily taxed, the first place that governments will go to confiscate physical gold is the primary banks' vaults.  Remember what happened to the precious metals of MF Global's customers after MFG went bankrupt in October 2011.

Goldman now recommends closing short gold positions. S&P argues that their ratings are not to be taken at face value.

Jesse has 2 excellent posts today.  The first is about Goldman Sachs and their prescient call approximately 2 weeks ago to short gold.  Yesterday Goldman publicised a recommendation to close gold short positions.  There were rumors last week that Goldman was buying gold during the price smack-down last week for their own account.

I am shocked, shocked that Goldman would recommend one thing for their clients while doing the opposite!!!
In the second part of this post he takes the much publicized economist Paul Krugman to task for using a 'we failed to notice' excuse.  Jesse's points out that if Krugman failed to notice the bubbles and corruption that led to the 2008 financial crisis, what is he over-looking now?

Jesse's second post is commentary about Standard & Poor's (S&P) unusual legal defense of the Justice Department's civil lawsuit.

For background S&P is a ratings agency.  Their business is to provide ratings that indicated the risk of specific investments, such as bonds issued by corporations, municipalities, and countries.  This is big business.  S&P has over 6,000 employees worldwide and publishes rating for over $3.5 Trillion of new debt in 2011.  S&P's ratings, such as investment grade or 'AAA' are very impactful.  For example, most bond funds are restricted by their charter to invest in debt instruments with only certain ratings.  In that way the interest rate that is charged to a municipality is dependent upon the rating assigned by S&P.

S&P had rated much of the mortgage backed securities that turned out to be junk in the 2008 financial crisis.  The US justice department is pursuing a civil case against S&P for fraudulently, knowingly assigning better ratings to these risky investments.

From the Wall Street Journal article on the subject:
Now, lawyers defending the company against the Justice Department's recent civil lawsuit say that statements about independence and objectivity are "puffery" and were never meant to be taken at face value by investors

This is absurd.  S&P is arguing that their product, ratings is not to be taken at face value.  Then what do all the bond issuers pay S&P for?  Why do investors pay any attention to S&P ratings?  

As Jesse succinctly puts it:
"And now we have the ratings agency defense: It can't be fraud, because everyone knows we are not objective and independent, even though we say we are and sell our services based on that claim.

Monday, April 22, 2013

Pensioners savings in Ireland wiped out to fund bank liquidation

Depositors at the bankrupt Irish bank IBRC are being wiped out because their Approved Retirement Funds (ARF) have been deemed by the Irish Central Bank to not be protected by deposit guarantee schemes.

Interestingly, the European Central Bank (ECB) is reported to have "gagged the (Irish) Government from releasing any information in relation to the liquidation of the former Anglo Irish bank, IBRC."

The Cyprus template of appropriating depositors' savings to fund bank liquidations is being utilized so soon.  This should strike fear in every depositor at Euro banks because all the Euro banks are all insolvent to varying degrees.  Perhaps many savers' Euros are stuck in accounts at the Euro banks similar to 401k plans in the US.  

This situation is very interesting and the lessons are applicable to the US because pension obligations of municipalities, state and federal government, and large businesses are much larger than any of those entities will ever be able to afford.  Although it is difficult to imagine depositor insurance such as FDIC not coming through (at least to $250k) there are many other ways to renege on promised pension payment, such as:
- chained CPI or any other benefit inflator that is lower than real inflation
- simply changing or limiting the payout calculation
- declare bankruptcy - such as the recent Hostess corporation bankruptcy
- devalue US treasury bonds since most pension plans are heavily invested in t-bills.

Difficult times lay ahead.  It will become more and more clear that many promises made have no chance or even an intention of being kept.  

The Irish reaction to this gag order will be interesting.  They have a proud history of bucking orders: even those from just across the Irish Sea, let alone from across the English channel.  And, the blarney stone is Irish!

New law to re-neg on Fed Employee financial disclosure

A sad story of our great country's leadership reneging on a commitment to make their financial dealings more transparent.  Make nice sound bites when the spotlight is on and then weaken the people's ability to hold you accountable while they are not watching.  Impressive how the Senate, Congress, and the President can rush a bill through in the current bipartisan political environment.  Obscuring financial dealing is clearly something that our representatives can all agree upon.

Congress this week approved a bill to free thousands of federal government employees from having to disclose their financial dealings online, rushing the bill through the Senate late Thursday and through the House on Friday.

Last year, after CBS’s “60 Minutes” did a report suggesting that some government officials were financially benefiting from insider knowledge of federal actions, Congress quickly passed the Stock Act, which was designed to crack down on insider trading.
Part of the law required that senior government officials’ financial disclosure reports — which they are already required to submit in paper — be made available online in a searchable, sortable format. The belief was that publishing them online would make it easier for reporters and the public to try to spot illicit dealings.

Sunday, April 21, 2013

The recent smack-down in precious metals and mining stocks is a buying opportunity.  The silver mining industry may be the best opportunity of all.

Gold prices were hit last Monday by large sell orders.  Large sell orders are most likely to have come from the core bullion banks because they are the only ones with so much metal/paper to sell.  And, who else would sell so much at once to depress the price in a market when they are selling.

How much more ammunition do the bullion banks have?  At the moment, the market for physical gold and silver seems to have disconnected from the paper market given recent reports of shortages.  Will the markets 'reconnect' soon?  Probably.  Could the bullion banks sell even more paper gold?  When will the promises of physical delivery by paper gold's derivative contracts become risky enough to be worthless or just significantly worth less than physical?

Silver and the mining stocks have followed gold prices down.  Presumably, investors needed to sell there investments to make margin calls on their gold holdings.  And, clearly mining companies are worth less when sales of gold realize less revenue.

The charts below of gold and silver spot prices remind us that we have seen large price drops before.  Volatility is to be expected in this battle between conjurable fiat currencies and historical, constrained, physical stores of wealth.  

Gold spot market prices from 2006 to 4/19/13.

Silver spot market prices from 2006 to 4/19/13

My attention is currently focused on silver because the central banks do not own it.  Sales growth of silver from the US Mint has been even faster than for gold.  Internet coin dealers are out of stock of many silver products.  

Saturday, April 20, 2013

US Mint Sales at Record for April already.

US Mint sales of Silver Eagles and gold bullion (Eagles and Buffalos) are brisk.  With only 2/3 of April included, sales are accelerating and continue to be significantly more than in 2012.  It's easy to believe that the US Mint may be running out of inventory.

Coin Dealers Paying More for Silver Eagles than the US Mint Charges!?

From the US Mint's website, the cost of Silver Eagles is $2.00 over the price of silver.  The method for determining the price of silver is not presented.

Premiums and Minimums
The United States Mint charges a modest premium above the current market price of platinum, gold, and silver to cover minting, distribution and marketing costs.

  • For the Silver Eagle, we charge the United States Mint's Authorized Purchasers the price of silver plus $2.00 per coin premium. Minimum ordering requirement is 25,000 coins.
  • For the Gold Eagles, we charge 3%, 5%, 7% and 9% premiums for the one, one-half, one-quarter and one-tenth ounce coins respectively. Minimum ordering requirements are 1000 ounces.
  • For the Platinum Eagles, we charge 4%, 6%, 10% and 15% premiums for the one, one-half, one-quarter and one-tenth ounces coins respectively. Minimum ordering requirements are 1000 ounces.
There are currently at least 3 internet coin dealers who are currently advertising 'buy' prices for Silver Eagles of about $26.00 per coin.  The market spot price yesterday for silver was $23.29 per ounce.  

There appears to be an arbitrage opportunity of $0.71 per coin.  The arbitrageur must pay for shipping from the US Mint and to the coin dealer.  The rest is pure profit.  For silver, the US Mint has a minimum order quantity of 25,000 ounces.  The coin dealers charge more for sales of 'Mint Direct' coins so they would probably pay more than $26 for them which would increase the arbitrageurs profit.  

Coin dealer are not likely to pay more for something that they could purchase directly.  After all purchasing coins from the US Mint is their 'bag baby'.  So why the apparent premium?  A couple theories:
- the US Mint is sold out of Silver Eagles and has none to sell.  
- the US Mints method for pricing does not or has not yet been affected by recent market price declines.
- the coin dealers will not really purchase at their advertised price.  The instructions for selling to the dealer includes calling, which probably includes obtaining a current 'live' bid price.

This is all very bullish for physical silver.  It will be interesting to see how these premiums behave over the coming weeks.

Silver Availability Survey - high commissions and no 2013 silver eagles

There are reports of severe bullion shortages at the Hong Kong and Dubai precious metals exchanges.  A quick survey of 3 North American internet coin dealers shows that silver availability is currently restricted.

Coin Dealer A:
1oz Silver American Eagle 2013
These items are on a slight delay. We expect to be able to ship these items by April 30th or sooner.
1oz Silver American Eagle Random Year, 2012, 2011, 2010, 2009, 2008Alert me when more come in 
1oz Silver American Eagle 2007, 2006, 2005, 2004$6.49 over spot
1oz Gold American Eagle 2013 
$74.99 over spot 
Advertised buy price for 1oz Silver American Eagles $26.98 

Coin Dealer B:
"The product, 1 oz Silver American Eagle, you have selected is temporarily unavailable in your region."This Dealers webpage allowed the user to enter an order for Silver Eagles.  The above message appeared after logging in to my account and viewing my 'shopping cart'.
Advertised buy price for 1oz Silver American Eagles: $25.79
Coin Dealer C:
1oz Silver American Eagle 2013
"Eagles Delayed 6 weeks"
Advertised buy prices for 1oz Silver American Eagles: $26.75
Advertised sell prices for 1oz Silver American Eagles: $29.08

Precious Metals Market Prices at Close Yesterday (Friday):
Kitco Gold Index - KGX
Did gold really go up 14.40?
Find out why the gold price changed
New York Spot Price
(Will open in 45 hrs. 11 mins.)
Buy goldGold Charts
Buy silverSilver Charts
Buy platinumPlatinum Charts
Buy palladiumPalladium Charts

In summary, at 3 large internet coin dealers gold is immediately available.  Silver Eagles are mostly out of stock.  The premium above spot for the few Silver Eagles in stock is high: $6.49 per ounce or 28%.  Some silver rounds and other coins are immediately available.  I could not find any available 100 oz bars.

Why are the coin dealers offering around $26 for a Silver Eagle when an ounce of silver cost only $23.39?  Certainly the US mint which produces the Silver Eagles charges more than the 'melt value'.  Is the US Mint's mark-up really that much?  I will post on that question soon.

Monday, April 15, 2013

Gold down almost 10% today!

Wow.  Now that is some volatility.  Why is gold valued at almost 15% less than it was a several days ago?

This is a buying opportunity for the long term.  Of course the opportunity may be even better tomorrow.  I am busy updating financial models to find the best investment opportunity for more of my fiat savings.  So not much time to write now.

I've read two theories regarding causes of the gold price crash that are very believable.  In summary:

1) Hedge funds are playing a momentum trade that started at the end of last year and shorting gold .  The core bullion banks (i.e. JP Morgan) have managed the price down to entice more hedge funds to go short.  The core bullion banks are close to having a long gold position (the other side of the hedge funds') that is equivalent to their long-rumored, legacy short position.  Once the core bullion banks are able to cover their gold derivative contracts, they will allow gold to appreciate and squeeze the now short hedge funds.

2) The paper or derivatives market for precious metals is becoming disconnected from the physical market.  The greater the perceived risk of delivery with a derivative contract the larger the disconnect.  The price of gold quoted in the press is the price for paper gold: a contract to receive the bullion.  However, purchasing physical or bullion at that price may be impossible.  A quick check of a couple retail internet  coin brokers shows that they do have bullion for sale with commissions that are similar to a week ago.  The real test is whether large physical purchases such as those made by central banks are being completed at these prices.  

Steady as she goes!  We knew that precious metals would be volatile.  

Wednesday, April 10, 2013

Goldman Sachs recommends investors short gold

According to the Wall Street Journal, Goldman Sachs (GS) is now recommending that investors close out long positions and initiate short positions in gold.
The firm (Goldmand Sachs) noted that its year-end price targets of $1,450 a troy ounce in 2013 and $1,270 in 2014 
Time will tell.   Of course GS could slam the price of paper gold any time by selling more derivative contracts.  So GS could make their forecast a reality.  I doubt they will do so.  I have become so skeptical of the big, core banks motives, especially with regards to investors, that I find this recommendation bullish for gold.

Friday, April 5, 2013

March US Unemployment 7.6% - underlying data even worse

The Federal Bureau of Labor Statistics just released their unemployment report for March.

Nonfarm payroll employment edged up in March (+88,000), and the unemployment rate was little changed at 7.6 percent, the U.S. Bureau of Labor Statistics reported today.   
The civilian labor force declined by 496,000 over the month, and the labor force
participation rate decreased by 0.2 percentage point to 63.3 percent. The employment-population ratio, at 58.5 percent, changed little. (See table A-1.) 
The Calculated Risk blog has a good commentary on the unemployment numbers and trends:

And here is Mish's commentary on the report:

How can 496,000 people drop out of the labor force in one month?  This looks like a blatant adjustment to reduce the headline unemployment percentages of 7.6%.

Thursday, April 4, 2013

3 Indicators that the Bull Market will not run much higher

This article about market conditions by John Hussman presents a couple strong indicators that the stock market is currently overvalued.

1) Currently, few investment advisors are bearish.  The percentage of investment advisors with bearish sentiment is now 18.8% of all advisors.  Historically, bearish advisor sentiment below 20% has portended significant market declines.  You read that right.  This is a contrarian indicator: when advisors are less bearish the market has declined.  This link explains the indicator:

2) Stocks are expensive compared to earnings.  The Shiller P/E is currently above 23X.  The Shiller P/E (Price to Earnings) is the total value of the S&P 500 divided by the 10-year average of inflation-adjusted earnings.  Historically, a Shiller P/E above 18X has indicated overvalued markets.

A chart of the Shiller P/E over time is here:

The S&P P/E today based on trailing 12 months of earnings is 18X.  The historical median for this measure of P/E is 14.5X.

3) Corporate profits after tax are 11% of GDP.  Historically, corporate profits average about 6% of GDP.  And, according to the Fed Reserve Bank of St Louis have never been above 10.5% until recently.

This all make sense.  The S&P is up 10% year to date and all the analysts are jumping on board.  Stocks are expensive to earnings because investors are bidding up alternatives to paltry interest rates on bonds with easy money from the Fed.  Corporate profits are a larger portion of the GDP 'pie' because the government and household sectors are being squeezed.  So, the question is when.  When will markets and valuations revert to the mean?  When will extend and pretend end?  My guess is within 3 years from now.  And, it seems that the current bull market in equities has little room to run higher.

Wednesday, April 3, 2013

Rik Green's Investors Forum Growth Portfolio up 1.8% in March

Rik Green's growth portfolio <Port-faux-lio> gained 1.8% in March and the S&P500 was up 3.5%.  CVX was up 2.1% and GG gained 3.7%.  The precious metals funds were almost flat: gold gained and silver lost a little.

Year to date the growth portfolio is flat while the S&P is up 10%.  Interestingly CVX is up 10% YTD along with the S&P.  The Fed's easy money is inflating stock prices and many other asset classes.  Recent easing Japanese Yen policy and loss of confidence in the Euro has also driven appreciation in US dollar denominated assets.  

So why are precious metals the exception and not appreciating?  The market prices for gold and silver are actively being manipulated down by JP Morgan among others with support from the US Fed.  JP Morgan has a large short position in gold and silver.  Check out Eric Sprott, Harvey Organ, and Jim Rickards for more about precious metals market manipulation.

I am currently wrestling with 3 major issues related to the investments in this portfolio:
1) Should I start selling CVX?  The growth port-faux-lio is heavily weighted in CVX.  CVX market value has been tracking the entire market.  Money may becomes less easy which would drag down equity, and specifically CVX prices.  
2) How much longer can the manipulators suppress gold and silver prices?  Gold and silver market values have not changes much in the last 1.5 years.  I can hang on for several more years.  But if they can get away with it for 10 more years, I might throw in the towel and search for better returns in real estate.
3) Why are gold mining companies and specifically GG not valued higher?  GG's current share price is only 16 times 2012 net earnings.  GG has a much higher P/E than the entire precious metals mining industry because its growth prospects are much better.  Is the entire industry under valued?