Saturday, February 13, 2010

Feb 13.10 commentary..important

Good morning Ladies and Gentlemen:
 
First of all, I have to report that there were no bank failures last night.  Defaults and delinquencies are occuring at record pace so this is rather strange.
 
The quarterly report on the FDIC will be out shortly and this will shed light on additional taxpayers funds  used to support the activities on this banking entity.
 
Gold closed down 4.90 to 1089.50 in regular comex trading, but resumed its upward trajectory in the access market closing there at 1092.20 basically at par.
 
The silver comex closed down 14 cents to 15.45.  Silver continued its advance in the access market as well rising to 15.51
 
The Dow plummeted early in the session on fears that the Greek bailout had no substance.  Then world came that China for the second time this year, clamped down on bank lending.
 
The Dow, at one point was down 160 points but recovered to be down by  only 45 points.
 
There has been a close symbiotic relationship that traders have adopted in that the Dow and gold rise and fall with each other in perfect harmony. Our banker friends do not want ordinary folk to buy
 
gold when the Dow plummets if fear is omnipresent in the marketplace. At 1:30 pm when the comex closed, the Dow was down 92 points.  The recovery of the market caused gold to be purchased in the access market. Gold recovered 5 dollars from the comex close until the access market close.
 
 
The open interest on the gold comex reported after the market closed, was quite intriguing.  The open interest on the gold comex basis Thursday, fell by 5500 contracts to 460,793.
Please recall that gold has a huge advance of 13.00 dollars in regular trading.  It looks like banking cartel members are fleeing the ship.
 
The silver comex OI also fell but only by a tiny 247 contracts:
 
 

The gold open interest fell 5474 contracts to 460,793. The silver open interest dropped 247 contracts to 118,324.

 

The big news came after 4 o'clock when the COT report was released and it showed a huge drop in the short position of the commercials. This is always the signal that gold will advance as the market

removed most of the speculative longs who got flushed out again for the umpteenth time by the crooked cartel.

 

Dan Norcini of Dallas Texas, is perhaps the world's best authority on the COT reporting and on technical analysis on gold trading.  His is very accurate in his assessment:

In his commentary this morning, he reveals the mechanics of trading on the comex and how the bankers short first and then cover later, fleecing unsuspecting longs.

 

Dan Norcini:

 

Text Size:   




 

Posted: Feb 13 2010     By: Dan Norcini      Post Edited: February 13, 2010 at 1:19 am

Filed under: Trader Dan Norcini

Dear Friends,

A few brief comments on this week’s release of the Commitment of Traders data are in order due the price action of the last few days. Please keep in mind that this data only covers price action through Tuesday of the current week.

I have circled the areas on the chart that I wish to call attention to in white. The specific date that I am interested in is 8/25/2009 within those circles.

If you note, the current data to the far right of the chart shows the lines designating the Managed Money, the Swap Dealers, and the Commercial/Producer/Users category within very close proximity of the area within the white circles, particularly 8/25. That is significant because it is during this time frame that the gold market was still trading within a two-month long broad consolidation pattern bounded by $970 on the top and $930 on the bottom. One week later, specifically on 9-2-2009, gold launched a massive upthrust obliterating overhead resistance centered near the $970 level as it moved up to $982. The very next session, gold tacked on another $22 more barely missing the $1,000 level. It never looked back from that point on carrying all the way to $1,227 in December where it reached a new temporary top. Since then gold has been in retreat with open interest steadily bleeding out as positions were liquidated across the board.

That position liquidation, by both longs and shorts, has resulted in the categories containing the largest traders receding to the same levels at which the last strong upleg in gold commenced. Yet, when we look at the price chart in gold, we see that as of Tuesday this week (the date through which the COT data is current) the price was trading at $1,077, fully $100 higher than the last time the major categories of large traders had net positions of this size. How to explain this?

It really is quite simple but critical to understand this – bullion bank selling caps gold to the upside as they attempt to eat through the plethora of bids in a rising market. They cannot hold back the rise in gold but they attempt to contain it. Once upside momentum begins to wane, the technicals turn and then the fund money begins exiting as longs are liquidating. It is into this long liquidation that the bullion banks do their short covering as they lift the shorts by buying them back. However, and this is the big key to understanding gold, the biggest physical buyers of gold on the planet (including the Eastern Central Banks) who only buy when they believe gold is now “cheap”, step in and actually compete with the bullion bank buying. That forces these perma bears to rapidly cover shorts at a much faster clip than they would prefer. After all, if the speculative crowd is in the process of throwing away their gold, why get in the way? Let them throw away as much as they can and the bullion banks can leisurely continue their short covering letting the market sink lower and lower as they profit all the way down. The problem that they have is the huge physical market in gold prevents them from having the luxury of sitting on their hands while the market drops lower. They are therefore forced to buy back at a much faster clip. That is what drops the open interest down to near the same levels as the last upleg began but leaves the price at a much higher level than the initial breakout run.

This has been the pattern for gold throughout the entirety of its now near decade-long bull market. It runs higher as speculative money flows in, backs off and retreats in price as bullion bank selling eventually succeeds in pushing price lower causing this long side speculative money to begin liquidating, only to then stabilize at a higher price after allowing for this liquidation. The result is that gold forms a new base of support at successively higher and higher levels consolidating its price gains while end users and big buyers of size become acclimated to the new, higher price. The market then eventually gathers steam inducing another wave of speculative buying which takes it on to a new, higher price once again and the cycle then repeats.

Think of it this way – you go to the store to find a bag of sugar. You see it normally sells for $2.50. You go in next week and it is now $3.00. Two weeks later it is at $3.50. A month later it is $4.00. What would most people do? Unless they really had to have it, they would probably wait to see if they might buy it cheaper especially if they had been coming in to the store to buy sugar and the last four months it had been trading at $2.50. At $4.00 they experience sticker shock. But then the price begins to drop. Down to $3.75 it goes in two weeks time only to be followed by another drop down to $3.50 during the next two weeks. By this time the buyer is beginning to think of $3.25 sugar as a bargain if they can get it there. If and when it does get there, they buy it. If the price begins to rise once again before it got to $3.25 where they thought it was cheap, they come back in and buy their sugar because they fear that it might start climbing back up to $3.65 – $3.80 or even $4.00 again before they can get it. Through this process, the term “cheap” takes on a new value in the eyes of prospective buyers.

Apply this now to gold – How many of us would have said back in $2005, that $1000 gold was “cheap”? Not many I would dare say. Yet this is precisely how the physical market in gold works and why gold finds support and stabilizes in price at successively higher price levels. Once the market looks as if it is through going down, guys who were looking to buy it “cheap” rush back in out of fear that prices are going to move up too quickly leaving them on the platform as the bull train leaves the station without them. Then the momentum funds move in and up it goes to another new high.

What encourages me as I look at today’s release of the COT data, is this pattern is still intact. One could basically make the argument that nearly all of the speculative long side money flows that took gold from $970 to $1227 over a 3 month period has been washed out yet gold is $100 higher in price than when the move began. In effect, the market has experienced a healthy washout and price correction and is now in the position of having a relatively low level of open interest, especially speculative hot money from the managed money crowd.

If gold can continue to hold above the recent lows and consolidate the gains made during the last few days of this week, it is setting itself up nicely for the next leg higher. The net long position of the Managed Money category could expand significantly before it would be anywhere near the peak made back in late November/early December of last year. There is now a lot of room for the speculative crowd to come rushing back into gold should the technical momentum turn decidedly to the upside. It is not there quite yet but a move above $1130 would probably do the trick. The key is whether or not the bulls can take advantage of their impressive performance this week and keep price from breaking below $1,050 – $1,045 for any length of time. A continued standoff in which further range trading is the order would be a major victory for the bulls short of an upside breakout given the tendency for seasonal weakness in gold during February. The fact that the bears could not break gold lower even with the weaker Euro this week is very significant and should not be underestimated.

Once again, the gold war wages on.

 

end.
Here is the release of the COT report:

SILVER:

*The large traders decreased longs by 4,486 contracts and increased shorts by 3,026.

*The commercials increased longs by 2,258 contracts and decreased shorts by 6,505.

*The small specs decreased longs by 623 contracts and increased shorts by 628.

GOLD

*The large specs decreased longs by 23,273 contracts and increased shorts by 5,377.

*The commercials increased longs by 7,398 contracts and decreased shorts by 23,754.

*The small specs decreased long by 61 contracts and increased shorts by 2,441.

And so it goes, The Gold Cartel fleeces the public in coordinated activity once again.

end.
 
Please note that in both silver and gold, the commercials bailed out of their shorts.
The silver saw a massive 6500 contracts covered and gold, a huge 23754 contracts.
Note also that the cartel members induced sone of the large traders to go short by an increase of 3000 contracts in silver and 5300 contracts in gold.
The small specs were nowhere to be found.
This sets the stage for a big run in gold and silver as outlined by Dan Norcini.
I am very pleased so see that Dennis Gartman, the "guru" on gold and silver liquidated his last "unit" of gold on Thursday.
He probably got word that the cartel were going to bomb gold on Friday so he sold along with the banker cartel.  He bought his 3rd unit at 1065.00 per oz but
also bought a put for 35.00 so his cost was 1100 per oz.  He liquidated at around 1085 so he lost 15.00 per oz again.  For the entire runnup in gold, this gentleman has not made
1 cent on gold and yet CNBC continues to bring him on the financial tube and he continues to spout garbage.  Here is the story on him:

This morning The Garman Letter abruptly eliminated its 3 ‘unit" gold position, the first time in several months this influential commentator has held no gold. While the pattern of declining highs since early December is cited, TGL also frustrated that it closed the FX hedge on its gold some weeks ago, which was a mistake. An early return to a FX/gold position is said to be likely.

In fact, TGL is correct that the firming $US has been very influential in gold recently. Using the Eurogold overlay chart available from Thebulliondesk.com, the divergence from the December 2 peak is such that if $US gold were tracking the Euro gold chart it would now be over $1,200.

Now that Gartman is out of gold, this shiny metal will resume its northerly trajectory!!. I would hate to see Gartman finally obtaining a batting average.  So far it is .00000!  (0 for 100 or so in gold trades)
I am also pleased to see that the premiums to NAV has returned to the Central Fund of Canada :

The CEF bullion vehicle closed at a 10.9% premium to NAV, the first double-digit premium in over a month and at a glance the highest since early November. The arrival of very high premiums in this instrument do seem to be associated with important strength in gold.

This is due to the disappearance of physical gold and silver.
 
On the silver and gold physical inventory:  more silver was removed by investors to the tune of 50,000 oz.
On top of this another strange phenomenon occurred, more silver contracts in Feb showed up and immediately stood for delivery.
The total amount of oz for Feb delivery is 3.96 million oz and this is a non delivery month.  There are still 150,000 oz standing waiting to be served.  These were obtained from options exercised as there is no February trading in silver. You can just imagine what March will hold if this continues.
There is only 47 million oz in the dealer inventory.  It is our bet that most of this silver is encumbered. Also note that silver remains in backwardation in the front two months.
Here is the official warehouse stocks and commentary:
 
 

COMEX Warehouse Stocks Feb 11, 2010

SILVER

ZERO ozs withdrawn from the dealer’s (registered) inventory 
50,295 ozs withdrawn from the customer (eligible) inventory 
Total dealer inventory 47.37 Mozs 
Total customer inventory 61.98 Mozs 
Combined Total 109.35 Mozs

GOLD

6,600 ozs deposited in the dealers (registered) category
ZERO ozs withdrawn from the customer (eligible) category
Total dealer inventory 1.64 Mozs 
Total customer inventory 8.29 Mozs 
Combined Total 9.93 Mozs

There was no silver that moved into or out of the dealer inventory…are we surprised? In fact there were only paltry movements of gold and silver today.

There were 170 delivery notices issued in the FEB gold contract. The FEB gold contract total for the month is 4,937 notices or 493,700 ozs. Deutche Bank issued none and stopped 71. BNS issued none and stopped 65 while JPM issued 104 and stopped none.

There were a stunning 275 delivery notices issued in the FEB silver contract. The total delivery notices for the month in silver stand at 792 or 3.96 Mozs.

SILVER CLOSED IN BACKWARDATION AGAIN TODAY. The backwardation FEB/MAR in silver is +0.2 cents ($15.592/$15.590). FEB/MAY contracts are in contango of only 2.4 cents.

The contango in gold is $0.1 for FEB/MAR and $0.5 for FEB/APR. Gold is still knocking on the door of backwardation. This means that the physical market is tight for both silver and gold.

The Open Interest in FEB gold reduced to 892 contracts. The open interest in FEB silver INCREASED to 300 contracts. Someone wants physical silver desperately. 

end.
 
On the physical front on gold, this story has huge relevance and very important in understanding demand and supply ratios.
The problem is over in South Africa which is the world's 4th largest producer of gold and largest producer of platinum. South Africa has been over the years the worlds largest producer of gold.
The miners here are going 5000 feet below the surface of the earth were temperatures are 130 degrees.  Now the utility Eskom wants to ration  power and raise the tariffs to these mining companies.
It would make these mines cost ineffective.  Goldfields, a large South African mining concern comments:
Power: Gold Fields 'deeply concerned'

I-Net Bridge | Thu, 04 Feb 2010 16:34
[
miningmx.com] --GOLD FIELDS, South Africa's largest gold producer, said it was "deeply concerned" about the power situation in South Africa.

"Our power has already doubled in two years," said Gold Fields CEO Nick Holland.

Now, Eskom's proposed tariff hikes would increase the company's power costs by a further 146% over the next three years…

http://www.miningmx.com/news/energy/Power-Gold-Fields-deeply-concerned.htm

end.
 
OK lets go to the economic news events of yesterday.
 
The big story came from China whereby they were going to rein in bank lending.  We got a head start on that number by seeing the Baltic Dry Index collapse this month.
Here is the story:

China surprises by raising banks' required reserves

BEIJING (Reuters) - China sprung a surprise on global markets on the eve of its New Year's holiday with an increase in banks' reserve requirements, a move that can slow bank lending and tamp down on rising inflation.

Although investors had been expecting the People's Bank of China to push the reserve requirement ratio higher after an increase last month, few thought the second rise would come so soon.

Markets were rattled by fears that the pace of monetary tightening in China would be more aggressive than had been reckoned on, potentially denting global growth.

Investors pulled back from riskier assets, buoying the dollar which rose 0.7 percent against a basket of currencies. Stocks fell, while European and U.S. bonds jumped.

"The central bank is sending clear messages to banks that it wants more reasonable bank lending and it is paying close attention to inflation," Xie Xuecheng, an economist with Southwest Securities in Beijing, said. The 50 basis point increase comes into force on February 25.

The surprise was all the greater since China on Thursday had reported an unexpected slowdown in consumer price inflation in January to 1.5 percent.

Analysts had cautioned that the dip in inflation was only likely to be temporary because of seasonal factors, but markets had still interpreted it as a sign that the central bank could proceed more gradually with its normalization of monetary conditions after last year's ultra-loose pro-growth policies.

But the January data also showed that, for all the government's insistence that banks control their pace of lending, Beijing was still struggling to rein in credit. Banks lent 1.39 trillion yuan ($203.4 billion), the third-largest monthly total on record.

After Friday's reserve requirement increase, China's biggest banks will now have to put 16.5 percent of their deposits on hold at the central bank, crimping their ability to lend.

"Even though the inflation threat is mild, the central bank has huge pressures to mop up excessive funds from commercial banks to reduce their urge to extend corporate loans," Shi Lei, an analyst at Bank of China in Beijing, said.

"But the hike will still not fundamentally tighten liquidity too much and there will be more reserve ratio hikes upcoming," Shi said.

Each reserve increase drains about 300 billion yuan ($43.9 billion) of liquidity. The Chinese economy remains awash in cash after a record surge of 9.6 trillion yuan in bank lending last year.

 
end.
 
The market did not like this news as China is the engine to supply the products the usa and Europe need.  However inflation is ripping into China big time and they want to cool their jets a bit.
Why the dollar would rally on this news is puzzling to me. China is willing to take initiatives to cool dislocations in their economy.  The usa is not.  The usa continues to spend relentlessly.
The dollar yesterday rose against all currencies including gold and silver.
 
News on the retail sales were released and it was positive:
 

US retail sales stronger than expected in January

WASHINGTON, Feb 12 (Reuters) - Sales at U.S. retailers rose more than expected in January as strong receipts from sporting goods, general merchandise, electronic and appliance stores offset flat purchases of motor vehicles, government data showed on Friday.

The Commerce Department said total retail sales increased 0.5 percent after falling by a revised 0.1 percent in December. Sales in December were previously reported to have dropped 0.3 percent.

Analysts polled by Reuters had forecast retail sales increasing 0.3 percent last month. Compared to January last year, sales were up 4.7 percent.

Retail sales are being closely watched for signs whether consumers are healthy enough to sustain the economy's recovery once government stimulus and the boost from restocking by businesses wanes.

Motor vehicle and parts purchases were flat last month, after rising 0.1 percent in December.

Excluding motor vehicles and parts, retail sales rose 0.6 percent in January after slipping 0.2 percent the prior month.

Economists had expected a 0.5 percent gain. Sales were boosted by electronics and appliance stores, where sales rose 1.2 percent after declining 3.5 percent in December. Sporting goods, hobby and books sales rose 1 percent last month, adding to December's 1.9 percent increase.

Sales at general merchandise stores rose 1.5 percent in January, the biggest gain since February 2009.

Core retail sales, which exclude autos, gasoline and building materials, rose 0.8 percent after falling 0.3 percent in December.

end.
 
Our famed John Williams of shadowstats.com immediately piped in: (from Jim Sinclair),,the gain was all inflation and seasonal.

Jim Sinclair’s Commentary

More smoke and mirrors revealed by www.ShadowStats.com.

"No. 279: January Retail Sales" 
- January Retail Sales Gain Reflected Inflation and Seasonals 
http://www.shadowstats.com

end.
 
The next reading was the University of Michigan consumer sentiment.
It is a very important number and it reversed to the downside:

09:55 Feb University of Michigan Confidence preliminary reading 73.7 vs. consensus 75.0
The final January reading was 74.4. 
* * * * *

U.S. consumer sentiment slips in early Feb -survey

NEW YORK, Feb 12 (Reuters) - U.S. consumer sentiment slipped in early February, with high unemployment expected to continue and with most looking for no gain in income or home values in the year ahead, a survey released on Friday showed.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of sentiment for February was 73.7, down from 74.4 in late January but up from 56.3 a year ago.

The reading fell short of analysts' median expectation of a reading of 75.0, according to a recent Reuters poll.

The survey's gauge of current economic conditions was 84.1 in early February, the highest since March 2008. It was up from 81.1 in late January and above the 81.4 predicted by analysts polled by Reuters.

But the survey's barometer of consumer expectations dipped to 66.9, down from 70.1 in late January and short of the 70.9 forecast by analysts.

"Few consumers anticipated any significant declines in the jobless rate any time soon, and the majority expected recurrent economic weaknesses over the next several years," Richard Curtin, director of the surveys, said in a statement.

"The cumulative financial strain during the past few years, coupled with the fact that the majority still expect no gains in their incomes, work hours or home values in the year ahead, has meant that consumers have remained extremely cautious spenders," Curtin said…

end.
 
In my opening paragraph I told you that there were no banking failures last night. There is word that the FDIC has leased massive space in the Chicago area and is set to employ hundreds of new people.
Does the FDIC expect massive failures in the MidWest?:

 from the Feb. 3rd Chicago Sun-Times

"BIG DEPOSIT: This could end up as one of the largest suburban leases of the year, but it can't be good. The Federal Deposit Insurance Corp. has leased 150,000 square feet, the entire building, at the Woodfield Corporate Center, 200 N. Martingale in Schaumburg. The federal guarantor of bank accounts needs what it calls a "temporary Midwest satellite office" as it processes receiverships and asset sales involving Midwestern banks. The FDIC said it will move in beginning in March and that the office will have up to 500 workers."

For what can they need all that space?

end.
 
I was quite surprised on this and I will follow up on this with Ted Butler et al:
CFTC's Gensler turns back on Wall Street to push derivatives overhaul

By Ian Katz and Robert Schmidt
Bloomberg News
Friday, February 12, 2010
http://www.bloomberg.com/apps/news?pid=20601109&sid=a3OkrdITAZtA&pos=10WASHINGTON -- Gary Gensler, chairman of the Commodity Futures Trading Commission, is shattering any illusions that his 18 years at Goldman Sachs Group Inc. would make him sympathetic to Wall Street's effort to weaken derivatives legislation.

Over a private lunch at the Waldorf Astoria hotel on Jan. 6, Gensler, 52, told bank executives that while he once shared their goals -- to boost revenue and increase their bonuses -- his responsibility now was to American taxpayers. And if he gets his way, Gensler said, their firms will be less profitable, according to three people familiar with the discussion.

 
 
end.
OK lets now go to macro economic news on the international scale and in the usa.
The world has seen a global injection of 26 trillion dollars covering all of those losses  from 2008-2009.  There has been no money earned to replace this "borrowed" money.
The usa has placed or guaranteed 13.7 trillion with the remainder from Europe and other nations.
With all of that new liquidity, Europe could not produce growth as it was stagnant in the last quarter: (from Bloomberg)

Europe’s Recovery Almost Stalls as Germany Stagnates

Feb. 12 (Bloomberg) -- Europe’s recovery almost stalled in the fourth quarter as waning spending and investment in Germany unexpectedly brought growth in the region’s largest economy to a halt.

Gross domestic product in the 16-nation euro region rose 0.1 percent from the third quarter, when it gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast expansion of 0.3 percent, the median of 34 estimates in a Bloomberg survey showed. The recession in Greece deepened, with GDP falling 0.8 percent in the fourth quarter after a 0.5 percent slump in the previous three months…

http://www.bloomberg.com/apps/news?
pid=20601087&sid=akPchh4Ed0Vo&pos=2

-END-

 
 
 
Please note that the GDP of Greece fell by .8% in the 4th quarter after a .5% slump in the previous 3 quarters.  This nation is in serious trouble with a debt to GDP ratio of 117% and climbing and a
deficit/GDP of 12.7%
I found this article by the National Inflation Association to be very good on the Greek and global debt problems:

Greece Distracting from Real Debt Crisis in U.S.

The current sovereign debt crisis in Greece and the potential for euro-zone countries to bailout the nation, has created a rush out of the Euro, which in October became the currency of choice for foreign central banks adding to their reserves. The declining Euro has added fuel to the strengthening U.S. dollar, and the ill-conceived notion that as bad as things are in the U.S., it's worse everywhere else and with the U.S. economy beginning to recover, Europe will be next to experience the financial crisis we experienced in 2008.

Unlike the U.S., the nation of Greece doesn't have their own printing press and the ability to create Euros out of thin air, in order to avoid default on their debt. While Greece's debt rating is currently an A2 with a negative outlook, the U.S.'s debt rating remains at AAA, despite the fact that the U.S.'s national debt (including unfunded liabilities) is currently 600% of GDP. If the U.S. was a corporation instead of a nation, its credit rating would be junk.

We hope that Greece doesn't get bailed out, because a bailout would cause foreign investors to become more irresponsible than ever and create even greater moral hazards. Unfortunately, not only is it likely that Greece will get bailed out, it's possible our own Federal Reserve will get involved. The U.S. Federal Reserve has the ability to make loans to foreign central banks without disclosure to the U.S. public. European banks have already benefited $50 billion from the U.S.'s bailouts of AIG, so it's not out of the realm of possibility that the Federal Reserve will intervene due to euro-zone countries being key U.S. trading partners.

Greece's budget deficit is currently 12.8% of their GDP, only slightly higher than the U.S.'s projected deficit as a percentage of GDP this year of 10.64%. Greece's economy is roughly 1/5 the size of California's economy and while Greece makes up just 3% of the total euro-zone GDP, California makes up 13.5% of the U.S. GDP. If the potential default of Greece is causing a flight from the Euro, imagine what is going to happen to the U.S. dollar later in 2010 if the state of California nears default. Just like Greece, California can't print money on their own.

We believe the U.S. dollar will ultimately win a race to the bottom with the Euro, but the only real winners (as far as retaining purchasing power) will be gold and silver. Although precious metals have declined during the recent weeks with a weakening Euro and strengthening U.S. dollar, gold and silver will soon benefit from a complete loss of confidence in western fiat currencies.

Many economists are beginning to call the Euro a failed experiment, because of the problems in Greece. A fiat U.S. dollar has only been around for 28 more years than the Euro. Fiat currencies are the root cause of all the economic problems in the U.S. and Europe. NIA believes all fiat currencies will be looked back at as failed experiments.

Please spread the word about NIA and have your friends and family subscribe for free at:http://inflation.us

end.
 
Dave Kranzler in his blog highlighted major problems in the usa and has reported that the state Government in Pennsylvania is seeking chapter 9 bankruptcy.
Pennsylvania although in trouble was not in the top 7 states that I reported to you on Thursday that were basically defacto bankrupt.
Here is his entire commentary with the Pennsylvania story embedded. (On Thursday, I highlighted to you the New Jersey debacle)

Friday, February 12, 2010

Greece is Irrelevant Compared to What's Unfolding in the U.S.

It just boggles my mind that the whole world, especially the mainstream media in this country, is completely - no, tragically - focused on the possible collapse of tiny Greece, when the real story is unfolding right under our nose in the U.S. Keep in mind as you read this that Greece's GDP is roughly 3% of total EU GDP. 

We all know about California's problems. Right now that State is staring at a $21 billion budget deficit - that forecast is probably too optimistic - and California already is over $6 billion in the hole on its unemployment insurance fund and is borrowing from the Feds to fund payments. Many States are now borrowing from the Government to fund unemployment claims. California represents 13% of total U.S. GDP, is the seventh largest economy in the world and has well over $500 billion in total debt outstanding (largely muni paper). Compare that to Greece, which has a little over $400 billion in debt and is insignificant in terms of global economic output. Yes,. Greece will default on its debt if it isn't bailed out, but what about California?

How about this piece of news which hit the wires yesterday afternoon after the stock market was safely closed: the New Jersey Governor declared a "fiscal emergency" because the latest budget proposal now has an $11 billion deficit, up from an $8 billion forecast deficit as recently as November, and up from the deficit in the current year which is projected to be $2.2 billion. Here's the Reuters link: 
NJ To Take a Dirt Nap? Last year New Jersey ranked 7th in relative economic output by State.

How about Pennsylvania? In a little-reported event last week, the State Government of PA is contemplating a Chapter 9 bankruptcy filing. Pennsylvania ranks 6th in economic output. New York is running toward the brick wall of insolvency. NY ranks 3rd in economic output. Ditto Illinois, which ranks 5th. Same for North Carolina, which ranks 9th. Michigan, Ohio, Nevada...

Anyone now think Greece looks problematic in the grand scheme of economic problems? And this analysis does not address the Federal Government debt swamp. Let me just say that anyone who believes Obama's forecast of $1.6 trillion for the next fiscal year is doing way too many bong hits. That budget deficit projection does not include an accounting calculation of the Government guaranteed entitlement payouts from all of the long term legacy psuedo-welfare programs like Social Security, Medicare, etc. From a financial accounting standpoint, that calculation needs to be taken into account annually, similar to the way it is required for all businesses. It also does not include several $100 billion in "off-budget" military expenditures. And the amount of total Treasury debt outstanding currently should include, but does not, some calculation that takes into account all of the recent guarantees issued by the Treasury in the last year which back trillions in banking system liabilities. Included in this number would be the $6 trillion of FNM/FRE debt being guaranteed, $600 billion in FHA mortgage paper, and the $1.25 trillion in mortgage paper purchased by the Fed. There are several other financial guarantee programs that will require billions in funding this year, like FDIC.

Anyone see any problems here? When you stack all of the above up against Greece, or even an aggregate of the so-called PIIGS + the UK, I think I'd rather have the EU problems than the catastrophic Debt Bubble getting ready to explode in the U.S. Make no mistake about it, Bernanke will soon be forced to seriously crank up his electronic printing press and dispatch a whole fleet of B-52 bombers to implement his infamous cash drop on a collapsing empire. It's exactly this predicament that is causing gold to move inexorably higher, making all those who forecast gold's price demise and lack of value look like complete idiots.

***

Greg Hunter in his blog talks about the derivative problems and how these pose a huge potential risk to our financial system.
In his article he states that the total derivatives are 600 trillion according to the BIS.  Actually, the BIS changed its nomenclature on these derivatives and lowered the quantum from 1.44 quadrillion to 600 billion due to a new term of valuation called "valuation to maturity".
You can bet that the total nominal quantity of derivatives in dollars is about 1.4 quadrillion dollars.
Here is Hunter's paper:

This Time Is Different, It’s Global!

12 FEBRUARY 2010 4 COMMENTS

By Greg Hunter   

The recently published book called “This Time Is Different” makes the case that this financial crisis has the same basic elements as every other financial crisis since the 1300’s.  Economists Kenneth Rogoff and Carmen Reinhart do a great job of researching various financial meltdowns in places like South America, Asia, Europe and the U.S.  In every crisis, no matter where it took place in the last 8 centuries, people thought a big debt buildup could not end badly.  The authors say “arrogance and ignorance” always pave the way to financial hell, no matter what country or what century. 

But I wonder if this time really is “different?”  Could this be the biggest financial crisis ever?  Former Federal Reserve Chief Paul Volker called this financial meltdown the “mother of all crises.”   How could he say that?  Well for one, the pool of unregulated over-the-counter derivatives is enormous.  There are $600 trillion worth of derivative contracts worldwide according to the Bank of International Settlements.   In simple terms, derivatives are debt bets between two parties that are very hard to collect on.  Most derivatives have no standards, no regulation and no guarantee; and there is no public market for them.  They are popular because bankers make insane profits selling them.  I wrote about this phenomenon in a post called“Can The Financial System Really Be Fixed? Some Say No.”  Warren Buffet called derivatives “time bombs.”  Buffet also said, “…derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”  Today, the entire world is financially interconnected like never before because of derivatives. 

One deficit record after another is being set on a regular basis in the U.S.  The debt load now stands at about $12 trillion.  With the recently passed debt ceiling, it will be at least $14.3 trillion by the end of the year. (There are also more than $6.2 trillion in liabilities with failed  mortgage giants Fannie and Freddie that are not accounted for in the U.S. budget)  America’s total debt and unfunded liabilities are in the neighborhood of $63 trillion.  Many experts say America will address this huge debt problem by printing money.  This will continue to devalue the dollar which is the world’s reserve currency.  This could cause inflation and calamity on a global scale.   

The news gets worse because just about every other industrialized country in the world is facing record deficits and liabilities.  Those countries will also print money to pay off debt.

According to Yale Economics Professor Robert Shiller, we had the biggest housing boom in history in the first part of the new century.  It was a first time global phenomenon.  Now, the U.S. and much of the rest of the industrialized world are working through the biggest housing meltdown in history, and it’s not yet at the bottom. 

Commercial real estate is also in the process of a record setting meltdown.   

Public pensions in the U.S. are a record $2 trillion in the red.

Nearly every state in the U.S. is facing record budget shortfalls.

Sovereign debt is being called into question with talk of national defaults on a scale unheard of before.  Just this week, economist Dr. Mark Faber said, “…I am not interested in government or sovereign debt because all governments will eventually default, including the U.S.”  Faber thinks governments will default, in part, by printing money to pay for their liabilities and debt.  That prediction spells I-N-F-L-A-T-I-O-N on a global level.  It is no surprise that Dr. Faber thinks gold will continue to outperform stocks. 

So, the things that got us in this financial crisis are no different than the things that caused other financial meltdowns throughout history.  I think what is different this time is the size of the debt buildup.  It is on a scale never before seen in human history.  Debt is overwhelming individuals, corporations and countries.  This global debt will likely produce the biggest financial meltdown in history, deserving of the Volker expression “mother of all financial crises.”

JIm Sinclair comments on the above article:

Jim Sinclair’s Commentary

I would add but one thing to this excellent article by Greg Hunter. That item is the fact that the drop from a total amount of nominal value outstanding for OTC derivatives from 1.44 quadrillion to the present level of slightly above six hundred trillion was a product of the BIS simply changing their means of computer valuation to "Value to Maturity," another total computer value cartoon.

That means the problem that started this disaster is wholly unattended to. The situation, although papered over, is wholly unattended to.

end.
I guess Switzerland is mad at the usa as it forces the end of secret swiss banking:

Credit Suisse Declares the U.S. a Riskier Investment Than Indonesia 
By Megan Carpentier 2/12/10 1:47 PM

Amid fears that Switzerland might come to an agreement with the United States on banking privacy and tax evasion disclosures, Credit Suisse issued a report identifying those countries it determined to have the highest risks of default on their sovereign debts. Number 16 on the list was the United States, based primarily on its 2009 budget deficits and government debt.

Countries ranked less likely to default include corruptocracy Kazakhstan, less-than-reform-minded Indonesia, the debt-ridden Philippines and violence-ridden Colombia. By comparison, U.S. Treasuries prices are up today despite a new issuance this week.

More…

end.
 
I found that blog by Eric deGroote on the Greek slump and how the EU plan is simply hidden from  all of us :
 

Friday, February 12, 2010

Greek slump threatens debt plan, EU aid elusive

A European Union government source said meetings of the region's finance ministers next week were unlikely to put together an aid package for Greece, suggesting governments were still unable to decide how to prevent the crisis from hurting financial markets' faith in the euro zone

Classic example of damned if you do, damned if you don't.

The bailout of Greece, when it happens, either transparent or opaque, inevitably means the bailouts of other weak EU members. The market is smart enough to anticipate which ones. In other words, the market participants will sense fresh meat - trading opportunities for organized pools of money at the expense of the taxpayer-sponsored printing press.

Of course, the disaster in Greece, compares with that of California, New York, and so on, but bias prevents anything more than token and cursory comparison. Rest assured that organized money will always circle fresh meat. Watch for similar beat downs in California, New York, Illinois, that will ratchet up the calls for bailouts within the U.S. Union. If the above is deemed bad for the Euro, the realization that the U.S. Union and EU share a common leg within a three-legged race, it won't be long before the same logic applies to the U.S. dollar.

U.S. Union and EU share a common leg:


Source: finance.yahoo.com

As Monday is a holiday in both Canada and the usa, my next commentary will be on Tuesday night.
bye.
Harvey.
 
 
 
 
 
 
 

 

 

Thursday, February 11, 2010

Feb 11.10 commentary..very important.

Good evening Ladies and Gentlemen:
 
Lots of news to send down to you tonight.
 
First off, gold closed much higher today up by $18.80 to 1094.10  Silver rose by 29 cents to 15.59.
 
The open interest on the gold comex hardly budged despite gold's advance yesterday.  It fell by 688 contracts.  This is extremely bullish as it indicates more commercial short covering.
 
The open interest on the silver comex also hardly budged falling by only 22 contracts.  Again short covering was the order of the day.
 
There are strange things going on at the physical side of the comex with respect to silver.
 
Today for some unknown reason, someone removed from the customer inventory 1.5 million oz of silver. I have never seen anything like this before.
T
 
To remove that quantity of silver would take 3 or 4 days and load up 5- 10 brink's trucks.
 
I guess somebody does not trust the comex folks to store their silver.
 
In another development, silver moved into a slight backwardation.  Gold saw the Feb to March spread at only 10 cents. The normal Feb to April spread is only 50 cents.
We are getting closer and closer to gold backwardation.  I will state that the game will be over once gold goes into complete backwardation.
 
Here is the story on the physical gold and silver comex and its inventory:
 

COMEX Warehouse Stocks Feb 10, 2010

SILVER

ZERO ozs withdrawn from the dealer's (registered) inventory 
1,571,368 ozs withdrawn from the customer (eligible) inventory 
Total dealer inventory 47.37 Mozs 
Total customer inventory 62.03 Mozs 
Combined Total 109.40 Mozs

GOLD

ZERO ozs withdrawn from the dealers (registered) category
5,219 ozs deposited in the customer (eligible) category
Total dealer inventory 1.63 Mozs 
Total customer inventory 8.29 Mozs 
Combined Total 9.92 Mozs

There was again for the umpteenth time no silver or gold that moved into or out of the dealer inventory! There was, however, a very large withdrawal from the customer silver inventory of 1.57 Million ozs. This is an extremely interesting occurrence on a day when silver closed in backwardation! Watch this space.

There were 66 delivery notices issued in the FEB gold contract. The FEB gold contract total for the month is 4,767 notices or 476,700 ozs. Deutche Bank issued none and stopped 29. BNS issued none and stopped 26 while JPM issued 59 and stopped none.

There were 41 delivery notices issued in the FEB silver contract. The total delivery notices for the month in silver stand at 517 or 2.5 Mozs.SILVER CLOSED IN BACKWARDATION TODAY. The backwardation FEB/MAR in silver is +0.2 cents ($15.302/$15.300). FEB/MAY contracts are in contango of only 2.3 cents (2.9 cents on Feb 9).The contango in gold is $0.1 for FEB/MAR and $0.5 for FEB/APR. Gold is still knocking on the door of backwardation. This means that the physical market is tight for both silver and gold.

The Open Interest in FEB gold reduced to 980 contracts. The open interest in FEB silver dropped to 41 contracts. 

 

 

 

end.

 

OK lets start with economic news today and there is a plethora of stuff today.

 

First the jobless numbers:

08:30 Jobless claims for w/e 6-Feb 440K vs. consensus 465K
prior week revised to 483K from 480K
 
•Continuing claims for w/e 30-Jan 4.538M vs. consensus 4.600M 
prior week revised to 4.617M from 4.602M 
* * * * *

Jobless claims fall sharply in latest week

WASHINGTON (Reuters) - The number of U.S. workers filing new applications for jobless benefits tumbled last week, a government report showed on Thursday, reversing a recent spike that had raised concerns about renewed labor market weakness.

Initial claims for state unemployment benefits dropped by 43,000 to a seasonally adjusted 440,000 for the week ended February 6, down from a revised 483,000 in the prior week, the Labor Department said.

Analysts polled by Reuters had expected 465,000 initial claims. The prior week was initially reported as 480,000, an unexpectedly high reading that was blamed in part on a backlog of claims that piled up over the holiday season.

A Labor Department official said that with this latest report, the administrative backlog was largely "washed out."

"By and large we are resuming a normal level with all states reporting an appropriate base level," the official said.

The four-week moving average, which smoothes out week-to-week volatility, fell by 1,000 to 468,500.

Investors are keeping a close eye on jobless claims for evidence that the economy is on the verge of adding jobs again. With the exception of November 2009, payrolls have declined in every month since the recession began in December 2007.

That has piled political pressure on President Barack Obama, whose popularity fell as the jobless rate rose to a 26-year high.

In an economic report released earlier on Thursday, the White House said it expects job creation to resume this year, although the unemployment rate will fall only slowly and it was concerned about the large number of people out of work for a prolonged period.

The Labor Department's report showed the number of people applying for benefits after an initial week of aid fell to 4.54 million in the week ended January 30, the lowest in 13 months. However, that figure is somewhat skewed by the fact that many people have dropped off the rolls because they have exhausted benefits, not because they have found new jobs.

-END-

 

 

 

Pay no attention to the sharp fall.  The reason for the fall is many benefits have been cut off as the year has run out and workers could not find a job.  Their benefits run out and the BLS just removes them from the total pool. 

 

I would like to report that tax revenues are falling in all states.

 

end.

 

This is the big story of the day...the complete failure in the 30 yr auction.  Please note the high yield of 4.72%, the extremely high 61.57% indirect bid and

the extremely low bid to cover ratio of only 2.36. The high indirect bid is the bid from overseas using the dollar swaps.  It is not foreign but the usa government buying their own debt.

The low bid to cover ratio means only the dealers bid for the bonds, nobody else.  The few who did bid and not part of the government demanded a higher yield.

Once the dealers buy the bonds they hand these over to the Fed.  Here is the result of the auction:

 

13:03 30-yr bond auction draws 4.72%, with 61.57% allotted at high
•Bid/cover 2.36 vs. average of the last 8 auctions 2.48
•Indirect participation 28.5% vs. average 43.24% 
•Following the results: 
5-yr (6/32) to 2.32% 
10-yr (14/32) to 3.72% 
Dow 10120.38, +82 
* * * * *

 

 

 

This chart shows the massive buildup of  dollars on the Fed balance sheet.  These excess reserves are now 1 trillion dollars:

The term Non-Borrowed Reserves of Depository Institutions is an euphemism for excessive reserves.  The Fed does not want us to know that the banks are not loaning.

This is an extremely important chart to see:  (from the St Louis Fed)

 

 

end

 

Here is another story on the bond auction today. If you want to see the real figures click on the treasurydirect.gov   link

30 Yr Auction Results 
CIGA Eric

Over 15% of the competitive bids were direct bids. This is up from 6.9% in Feb. These percentages follow a similar trend revealed in yesterday's 10-year auction results.

The reaction in the bond market and chatter around the trading desks hints of debt monetization. The lack of transparency with direct bids serves only to fuel the speculation.

Source: treasurydirect.gov

More…

 

The big story of the day is the bailout of Greece.  We have been telling you now for over two years, the plight of the Greeks and today, the ECB announced

that they were going to bail them out.  The problem is there was no mention of any money and no details.  They have no plan because there is none.

 

How on earth is the ECB going to bail out, Spain, Ireland, Portugal, Italy.  Not only that but the Europeans have given massive aid to Eastern Europe who are also defaulting.

The Baltic states have been funded by both Sweden and  Europe.

 

Here is the official story:

03:20 EU Finance Ministers agreed aid package to draw on expertise of ECB and IMF -- Reuters citing EU government source
Per Reuters, EU Finance Ministers agreed 
•Euro-area member states will take determined and coordinated action
•Greek aid won't involve drawing on IMF funds
•Greek aid package to be contingent on additional Greek measures to overcome fiscal problems
Headlines - SA London

06:54 EU's Barroso says accord to help Greece cope with its deficit crisis has been reached 
European Commission President Jose Barroso speaking in Brussels says an accord with Greece has been reach and will be announced later. €$ 1.3745 
•German Chancellor Angela Merkel said European Union leaders will make a statement today that Greece won't be left to sort out its debt problems on its own, while it will be held to strict rules.

07:24 EU President Herman van Rompuy says Greece hasn't requested financial support
van Rompuy is making an announcement regarding the aforementioned agreement on Greece. Van Rompuy says euro-region governments will take "determined and coordinated action" if needed to safeguard financial stability in the euro region. Markets and currencies continue to move on each headline, with the euro/dollar having given up earlier "deal-induced" gains in the wake of the latest statements. 
•€/$ last 1.3717
•SPH 1066, +0.22 to fair value
•Dax (0.2%) to 5525.6, having given up about 25 points in the past couple of minutes 

 

 

end.

 

There are some terrific commentaries on this subject.  The best one was by Dave Kranzler.  He is bang on!:

 

Thursday, February 11, 2010

More B.S. in the Press About Gold...

Marketwatch has an article out that attributes the big move in gold today to the fact that Greece will not be selling any gold in order to raise funds as part of its bailout. Here's the link: Garbage reporting. One analyst in the article referenced the Washington Agreement which limits the amount of gold the ECB can sell to 400 tonnes. We're four months into the current WA year and the ECB has barely sold any gold, leaving plenty of room for Greece to sell its gold if it so chooses.

Here's what's really going on with gold. To begin with, Greece reports holding 112 tonnes. If Greece wanted to sell all of it, make no mistake that China or India or Russia would jump at the chance to pay the current spot price for all of it. That would leave plenty of room for other ECB member banks to sell gold this year if they so choose. That would raise roughly $4.2 billion for Greece. Why wouldn't they sell?

Gold shot up today for several reasons, not the least of which is the fact that a committed bailout of Greece will involve using the euro printing press to monetize part of the situation. The printing of fiat currency is the nemesis of gold and nothing makes gold move up more quickly than the smell of the fiat printing presses running overtime. Second, Viet Nam devalued its currency yesterday, and based on the premium of $54 over the spot price of gold being paid in Viet Nam, it would appear that the population there is scrambling to buy physical gold. Viet Nam is quietly one of the largest buyers of gold in the world. And finally, the bailout of Greece is the first in a long chain of sovereign bailouts, including big State bailouts in the U.S., which will require massive fiat currency monetization. Gold smells that stench and has screamed higher accordingly.

Always remember, there's the Orwellian Ministry of Truth truth, and there's The Golden Truth.

***

As I indicated above, gold rose over 18 dollars today.  One of the crazy reasons given for golds advance was that Greece will not use its 112 tonnes of gold.  Instead the ECB will print the euros needed to bail out

Greece.

Yesterday, I forgot to mention that Viet Nam devalued its currency  and today, it registered a premium of 54.00 per oz premium over spot.  Viet Nam is becoming one of the largest purchasers of gold today as their entire real estate is backed by real gold.  They need to import vast amounts of gold.

Dave, also mentions that the usa has major states in trouble which will require massive fiat monetization.  Please pay special attention to what he says.

 

Here is Jim Sinclair on the subject:

Jim Sinclair's Commentary

This is raving BS. When push comes to shove, the money will be forthcoming. Similarly the USA will bail out all the States of the US as they keel over.

The difference between the EU, USA and China is that China has a contingency plan for everything conceivable, and the West plays "Pretend and Extend" with no contingency plan whatsoever.

As a businessman I do the "What Ifs" almost to exhaustion with a plan for everything conceivable. Where do we find our financial leaders?

EU leaders offer Greece moral support but no aid

BRUSSELS – European leaders on Thursday offered moral support for Greece — but no money — as they sought to calm speculation that the Greek debt crisis may spread to other vulnerable countries and damage the euro currency.

The leaders promised to "take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole." But they left out any detail about what they might do to prevent the country from defaulting on its massive debt.

With the euro facing its worst crisis since its birth in 1999, European Central Bank President Jean-Claude Trichet tried to lend his sizable credibility to shoring up market opinion about Greece, saying he will join in monitoring the government's promised budget cuts — and planning new ones if necessary.

"One can count on our permanent alertness," he said. The leaders also called on the International Monetary Fund — which has extensive experience in monitoring bailouts — to give its advice on Greece's efforts, though the EU leaders have ruled out Greece taking an IMF bailout loan, as have non-euro EU members Hungary, Romania and Latvia.

Markets gave a mixed reception to the leaders' statements. The euro fell to $1.3614, having been as high as $1.38 earlier in the day on hopes of more substantive Greek bailout news. It traded at $1.51 in late November. German and French stocks were down, while shares in Britain, which doesn't use the euro, were flat.

More…


 

Please note:  moral support but no substance. There is no plan.

 

end.

 

The Fed announced again that they were going to drain one trillion dollars from the system  when the time is right.  They are now "going to test" the system on its drainage plan.

 

This is nothing but utter garbage.  They cannot drain 5 cents.

 

This is what the legendary Jim Sinclair states on this subject:

 

My Dear Friends,

Doesn't it get tiring to hear the propaganda of government and business over the airwaves telling us exactly what isn't correct?

I started this morning on the note of the Fed going to drain one trillion by negotiations with money funds which I know is absolute bunk. Then I see two events today of blatant QE while I hear how the Fed is going to drain huge amounts of the liquidity that was added to the market. Coming up next will be the EU having a plan to bailout Greece, but the ECB will not say what that plan is because they have no plan, only intentions.

Some people have observed that I know what gold is doing without looking because I feel it. Well, I do.

Right now I feel totally frustrated by the degree of misinformation spewing out of every form of media.

Nobody can be that stupid.

They are either all kissing up, or there is a Propaganda Czar who runs it. I will go with the former and a tad of the later plus the fact that Wall Street is a major investor in F-TV.

Is it possible that gold is fed up with the lies and distortions that are so apparent Mr. Fred barks at the TV? It is, and I sense it happened today.

We have been discussing over the last few days the fact that no currency on the planet is any longer a storehouse of value. We are headed into a system of taking a ticket to get bailed out sovereign wise.

The relationship between leading currency and gold is never going to be cancelled, but it is loosening.

Gold is your only good insurance policy.

Who knows, we may be long gold for a much greater period of time and price than I anticipated in 2001.

Respectfully yours, 
Jim

The Fed has no way to drain this liquidity because of the huge losses in 2008 and 2009 and these cracks must be filled with real money from other sources which are not forthcoming.

You will hear this until doomsday and nary a cent will be recalled.

 

end.

 

This will surely help the banking industry:

 

Citi to let distressed homeowners stay for 6 mos. 
Citigroup plan lets homeowners avoid foreclosure, stay for 6 months if they turn over deed 
By Alan Zibel, AP Real Estate Writer , On Thursday February 11, 2010, 12:27 am EST

WASHINGTON (AP) — Citigroup Inc. plans to let homeowners on the verge of foreclosure stay in their homes for six months — if they turn over the deed to their property.

Citi said Thursday it is launching the pilot program, dubbed "Foreclosure Alternatives," this week in Texas, Florida, Illinois, Michigan, New Jersey and Ohio. Initially, about 1,000 homeowners are expected to participate. Citi may expand the program nationwide.

In a normal foreclosure, a lender assumes legal control of the property and evicts the homeowner. But Citi's program, like other "deed in lieu of foreclosure" efforts, allows the homeowner to avoid a completed foreclosure. While the owner must still leave the home after six months, the program results in a less severe hit to the borrower's credit score.

More…

end.

This will surely knock the socks off the Federal Debt Limit...Fannie Mae and Freddie Mac buying delinquent mortgages.  Here are two stories:

(from Jim Sinclair)

Dear Jim,

I got a call this morning from a bank bond trader who alerted me to the following story in Bloomberg, telling us that Fannie and Freddie are buying up all mortgages currently in their pools 120 or more days past-due. The process and the math involved will probably bore the general public and so they will probably never get the true story, but here is the bottom line…

–The government's balance sheet (through these two GSEs) is about to balloon even more, and my trader friend tells me the number of mortgages is significantly higher than most observers thought.

–If it is true that the Chinese are dumping their MBS, they just saw the bid drop another point or more.

–Fannie and Freddie will tout this as a way to not have to tap into the Treasury, but these loans were and still are headed for foreclosure.

The only advantage here is that they are more efficiently calling these in, eliminating the extra interest rate expense they had (which was guaranteed to the now-in-even-more-pain securities holders) on these non-performing loans. The result? They will now be financing a much, much larger inventory of delinquent mortgages at sub 1% rates.

And the MOPE is: Don't worry be happy. All is well. Don't you know? That's why we pay those Fannie and Freddie executives the BIG bucks! ;)

The Bloomberg article title gives a hint at more MOPE: "Fannie, Freddie Loan Purchases May Spur 'Wad of Cash'," suggesting that the money taken from these pools will go back into the market and off-set the Feds end of MBS purchases. Uh humm. So I called a few portfolio managers. No, they are not planning on reinvesting into the mortgage market. As I suspected, they're pissed off at just another erratic act of the government and its bankster henchmen.

CIGA Nick

Fannie, Freddie Loan Purchases May Spur 'Wad of Cash' (Update2) 
By Jody Shenn

Feb. 11 (Bloomberg) — Fannie Mae and Freddie Mac's plan to step up purchases of delinquent loans may boost prepayments on their securities to rates that in some cases would erase all of the debt within a year. Yields over government notes on some of their bonds fell to 17-year lows on speculation the move would lead to reinvestments in the mortgage market.

The constant prepayment rate, or CPR, for Freddie Mac's 30- year fixed-rate securities with 6.5 percent coupons will likely surge by 70 this month under the plan released yesterday by the McLean, Virginia-based company, based on Bloomberg calculations. The measure, which was 17.2 last month, represents the share of the debt that would be retired in a year at the current pace.

Freddie Mac said yesterday that it would buy "substantially all" loans with payments late by 120 days or more from its securities in the next month. Fannie Mae said later that it will "increase significantly" its buyouts, setting a less aggressive timeline. The value of Freddie Mac's delinquent loans is $70 billion, while Fannie Mae has $130 billion of the debt, according to Citigroup Inc. data.

More…


end.

 

World bond sales are tumbling as everybody is becoming risk averse..Please refer to  the Fed St Louis Chart on excess reserves above in my commentary,  to understand what is happening throughout the world.

I guess the whole world is QEing  with their own currency.  And gold goes down on some days?

Here is this stunning article by Bryan Keogh on the bond sales tumbling by 90%:

Bond Sales Tumble 90%, Junk Returns Go Negative: Credit Markets 
By Bryan Keogh and Gabrielle Coppola

Feb. 11 (Bloomberg) — Investment-grade debt sales are drying up and returns on high-yield bonds have turned negative for the year as investors wait to see whether Europe will bail out Greece.

Borrowers in the U.S. and Europe sold $3.94 billion of high-grade securities this week, the least this year and about 90 percent less than the average $52.9 billion, according to data compiled by Bloomberg. Speculative-grade, or junk, bonds in the U.S. have lost 0.09 percent in 2009 after gaining 1.52 percent in January, Bank of America Merrill Lynch index data show.

Investors are avoiding credit risk as European Union leaders meet to hammer out an aid package for Greece. While relative borrowing costs in the U.S. remained steady yesterday and prices to insure against defaults fell, Huntsville, Alabama- based telephone service provider ITC Deltacom Inc. canceled a $325 million bond sale, citing "current market conditions."

"Sentiment has turned significantly amid concerns about sovereign deficits and problems surrounding Greece and other peripheral euro-zone economies," Simon Ballard, a senior credit strategist at RBC Capital Markets in London said yesterday. "For the moment, we're unlikely to see much in the way of primary market activity as investor sentiment remains fragile and the broad market feeling is one of nervousness."

More…

Here is Jim Sinclair on the above article:

Jim Sinclair's Commentary

Remember all the yearend blabber about the US recovery and its sustainability? This is what I am talking about when I suggest that gold is saying that people are fed up internationally with the lies and distortions that are so evident.

As dumbed down as the Western World sheeple are, this stuff is so transparent that Mr. Fred gets sick to his stomach.

Do you remember the leading light of money management that bought a railroad line to show his confidence in the US recovery and its sustainability? Even some of our guys jumped ship on gold considering the economy to be stronger than anticipated.

Doom and Gloom got bullish, losing his grasp of what hyperinflation is made from – loss of confidence. Confidence looks to me as if it is tearing apart at the seams. That would suggest a Western world hyperinflationary experience as all Western currency accelerates towards the bottom of worthlessness against Asian currencies as a whole. The Western world paper fiat money is no longer seen as a storehouse of value anywhere from Wall Street to Main Street.

Do you think the principles of the major international investment banking houses are keeping all their bonus bonanza in dollar and general equities? You have to be kidding yourself.

Batten down the hatches. The storm is here and now.

Do you think China might consider bonds of US corporate entities to be "Risky Assets?" I do.

 

end.

 

Oh dear, another state has declared a state of emergency.  Today it is New Jersey, one of the 7 states we told you that were basically bust:

Get a load of this article:

Chris Christie declares fiscal 'state of emergency,' paving way for N.J. spending cuts 
By Claire Heininger/Statehouse Bureau 
February 11, 2010, 12:12PM

TRENTON — Calling New Jersey on "the edge of bankruptcy," Gov. Chris Christie today declared a fiscal emergency, seizing broad powers to freeze aid to more than 500 school districts and cut from higher education, hospitals and the Public Advocate.

"New Jersey has been steaming toward financial disaster for years," the Republican governor said in a speech to both houses of the Legislature. "The people elected us to end the talk and to act decisively. Today is the day for the complaining to end and for statesmanship to begin."

Along with eliminating programs "that sounded good in theory but failed in practice" across state departments, Christie is cutting $475 million in aid to school districts, $62 million in aid to colleges and $12 million to hospital charity care. He is pulling all funding from the department of Public Advocate, a longtime Republican target, and folding its functions into other parts of government. He is cutting state subsidies for NJ Transit, a move Christie said could lead to higher fares or reduced services but would force the agency to become "more efficient and effective."

Schools and colleges will be forced to spend their surpluses in place of the state aid, Christie said. His plan is an expanded version of one proposed by Corzine after he lost re-election but before he left office. Corzine said it would have required legislative approval to target only districts with an "excess surplus," but Christie said he can freeze the funds unilaterally.

The cuts — which do not include municipal aid or unpaid furloughs of state workers — are aimed at resolving a $2.2 billion deficit in the current budget created by falling revenue and increased costs for various programs. Corzine enacted some cuts before Christie took over. Christie says he was left with a $1.3 billion deficit.

More…

 

end.

I know there is a lot of reading tonight, but the last article by author Egon von Greyerz is a dandy.  The author puts together everything I have commented upon these past few years.

I am downloaded the entire article for you.  You should keep this article on hand at all times and refer to it as the debt crisis magnifies in the days ahead.

I will now say good-buy and I will report to you on Saturday with fresh data on bank failures and the COT report.

buy

Here is the article by Von Greyerz:

 

Sovereign Alchemy Will Fail

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by Egon von Greyerz – Matterhorn Asset Management

When we look at the world economy today, wherever we turn we see a wall of risk. And sadly this is an insurmountable wall with risks that are totally unprecedented in history. There has never before been a potentially catastrophic combination of so many virtually bankrupt major sovereign states (US, UK, Spain, Italy Greece, Japan and many more) and a financial system which is bankrupt but is temporarily kept alive with phoney valuations and unlimited money printing. But governments will soon realise that they are not alchemists who can turn printed paper into gold. The consequences of the global financial crisis are potentially catastrophic.

As the Austrian economist von Mises said: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved."

 

In our view, governments like the US and the UK and many others will not abandon further credit expansion. They are committed to printing increasing amounts of worthless paper money in order to finance the growing deficits and the rotten financial system. Therefore there is no chance of Quantitative Easing ending but instead it will accelerate in 2010 and after. The consequence of this will be a hyperinflationary depression in many countries due to many currencies becoming worthless. No economy in the world, including China, will avoid this severe economic downturn which is likely to have a major impact on the world economy for many, many years to come.

Investors are ignoring the risks

What makes the current situation in the world economy so intriguing is that most investment markets have not recognised the risk. Stockmarkets and bond markets rallied substantially in 2009, totally oblivious of the risks. The housing market is down in the US and some European countries like Spain and Ireland. But in many other countries it is still near the bubble highs created by low interest rates and reckless lending.

The most important criterion, when taking investment decisions, is understanding the risks involved. Matterhorn Asset Management has in the last few years warned investors about the risks in the financial system due to the massive worldwide credit expansion and money printing. We have found it difficult to fathom so few people realise that the world economy has become a time bomb waiting to explode or more likely implode. All the so called experts have declared that it is impossible to identify the problems in the financial system in advance. For example, Greenspan, Bernanke, Geithner, other central bankers and government officials as well as Blankfein of Goldman Sachs and many bank heads have all stated that they couldn't see it coming. Either they are lying or they are stupid. Sadly, it is most likely the former. It is virtually impossible to find an honest politician. They have one major objective – Power. To attain power they have to buy votes. But to buy votes they cannot tell the truth. No politician ever forecasts bad news because bad news does not buy votes. (Yes, there are exceptions like Ron Paul in the US). And as regards the bankers, it is definitely not in their interest to worry about risks to the financial system. For every year that they issue additional toxic debt and derivatives they earn more in that single year than most normal people earn in a lifetime.

Sovereign Defaults

The list of countries at risk of bankruptcy is increasing by the day. The acronym used to be PIGS (Portugal, Ireland, Greece and Spain). It is now PIIGSJUKUS and growing. The main contenders are currently: USA, UK, Japan, Spain, Italy, Greece, Ireland, France, Portugal, Baltic States, Eastern Europe and many more. On a proper accounting basis all of these countries are already bankrupt, but since many nations can either print money like the US and the UK or increase their already high borrowings, like Greece or the Baltic States, they have technically avoided bankruptcy although in reality all the countries in the list above are basket cases with very little chance of a return to normality. Shown below is what we call the Sovereign Time Bomb. The bomb consists of countries that have a combination of budget deficit and borrowings relative to GDP which puts them into the category "Time Bomb" or high risk of default. These countries have budget deficits from 6% (Italy) to 12.5% (UK, Greece) of GDP and their Public Sector Debts are ranging from 60% (Spain) to almost 200% (Japan) of GDP.

The Sovereign Time Bomb

The problem is not just the current debt levels of these nations, because the deficits in all the countries are rising. Tax revenues are collapsing and with rapidly rising unemployment, the governments' expenses for social charges are soaring. In the US for example the federal deficit in 2009 was $1.5 trillion (10.7% of GDP) and is forecast to stay around that level for many years. The plight of the US states is just as bad. Out of 50 states only 4 are expected to have a balanced budget in 2010. Up to 40 states, including California, New York, Florida, Illinois, Michigan, Ohio, North Carolina and New Jersey, are virtually bankrupt.

It took almost 200 years for US Federal debt to reach $ 1 trillion which it did in 1981. In 2009 the debt increased by $ 1.9 trillion in just that year to $ 12.4 trillion. In the next ten years the US debt is forecast to reach $ 25 trillion. And this doubling of the debt does not include any funds to prop up a bankrupt financial system or the spending of tens or maybe hundreds of trillions of dollars on worthless OTC derivatives. The forecast also assumes growth in GDP which is extremely unlikely especially for the next 2-5 years. Currently US Federal debt is six times what it collects in tax revenue every year. With debt exploding and tax revenues collapsing, there is no chance that the debt can ever be repaid with normal money. Also, with debt out of control interest rates will rise substantially to 10-20% per annum. Applying a 15% interest rate to a $ 25 trillion debt would give an annual interest bill of $ 3.75 trillion which would be substantially more than tax revenues.

The chart below shows the US Federal Debt per person. In the last ten years it has gone from $ 20,000 to $ 40,000. Total US debt, including private and corporate debt as well as unfunded liabilities, comes to $430,000 per individual. It is an absolute certainty that every man, woman and child in the US cannot pay off almost half a million dollars with normal money. Only massive money printing will take care of that.

With these levels of deficits for the next ten years on top of an already massive debt, there is no possibility whatsoever that the US economy can avoid bankruptcy. No country has ever abolished debts of this magnitude by printing paper and the US will not be the first one to succeed either.

 

Only  Lose – Lose  Options

Governments have two choices – continue to borrow and print money or reduce government spending.  This is a lose – lose situation and whatever choice they make it will end in disaster.  Countries within the EMU like Greece or Spain are introducing austerity programmes that forecast their deficits to come down to 3% of GDP which is the EU maximum deficit limit. These are totally unrealistic targets that are mainly based on an improvement in the economy which is total fantasy. The dilemma is that not one single country within the EU is below the 3% limit, not even Germany. And the effect of the austerity programmes will lead to such a major contraction of the economies that tax revenues will collapse, further exacerbating the plight of these countries.

The alternative is to print or borrow more money. Printing is not a luxury that individual EMU members have and for these insolvent countries to borrow money is becoming almost impossible or very costly. But the European Central Bank can print money and this is likely to be the path they will initially choose to save Greece and possibly Spain. Countries like the US and the UK can still borrow and print money. And this is what they will continue to do. With rising deficits, rising unemployment and the problems in the financial system re-emerging they have no choice. Both the UK and the US are set upon a course of self-destruction. We will see trillions of pounds and dollars printed in the next few years. But the only buyers of these government securities will be the US and UK governments. The rest of the world will dump their holdings which will result in both the dollar and the pound dropping precipitously and interest rates rising substantially.

Hyperinflation – Consequences

The effect of a collapsing currency will be a hyperinflationary depression. This is the inevitable outcome for the UK and US and there is sadly no action that the governments of these countries can take to alter this course. We discussed the consequences of this outcome in our July 09 newsletter – "The Dark Years Are Here". There will be extreme poverty. None of the social safety nets will function. So most of the social security payments that people in need have been used to will disappear or be worthless due to hyperinflation. There will be severe shortages of food which will lead to famine and social unrest. Hungry people are restless people that will take the law into their own hands. This will lead to violent protests, lawlessness, theft and violent crime. And there is unlikely to be a force of law that is paid and functional to deal with the problems. Already today, many US cities and states are cutting down on the police force and their equipment. This trend will accelerate during 2010 due to budget cuts and lack of funds.

There will be massive cuts in education and many schools will close due to lack of resources. Pensioners will be major sufferers. Many pension plans are unfunded but also the funded ones will be decimated. Pension funds are invested in three areas – equities, bonds and real estate. All three are likely to go down by at least 50% but probably more like 75% at least, all in real terms.

Deflation and Inflation

Most economists and financial analysts disagree with the hyperinflationary scenario and believe that the deleveraging of debt will lead to a deflationary downturn. That scenario would be more likely if countries like the US and UK were not printing endless amounts of fiat money. As we have explained above the printing presses will not slow down but they will accelerate in coming years. The UK's announcement that they will cease Quantitative Easing is just a temporary measure that won't last.   Governments detest deflation because they know that deflation after uncontrolled credit growth would lead to an implosion of the financial system and the economy. Virtually all bank loans and OTC derivatives have been issued against inflated and unsustainable asset values. In a deflationary economy with falling asset values, falling wages, falling corporate profits and falling government revenues, there is no possibility that the massive amount of bank credit outstanding can be serviced or repaid. Therefore the banking system would not survive due to their massively inflated balance sheets and low equity. This is why governments are petrified of deflation after a sustained period of asset and credit bubbles. So their only option is to print whatever money is required to stave off deflation. And this is what they will do. There is absolutely no doubt about it.  But they are doing this in total ignorance of the consequences.

Governments created the financial crisis

The current financial crisis was not created by the banks. It was created by governments' irresponsible policies of buying votes by manipulating the financial system through constant money printing, especially since the creation of the Fed in 1913 and the abolition of the gold standard in 1971. In addition they have used interest policy as a popularity contest thereby creating a totally artificial market which distorts the normal laws of supply and demand. It is clearly ludicrous to artificially keep interest rates at 0% and print massive amounts of money.  Neither governments, nor banks should be allowed to create money out of thin air or interfere with market forces by artificially setting interest rates. It is this corrupt manipulation of the financial system and the economy that has totally destroyed the value of money in the last 100 years. Measured against gold, the dollar and the pound have declined by 99% since 1913. This would not have happened if governments had not been allowed to use the financial system as a voting machine. But sadly this will continue at an accelerated pace in the next few years. Governments seem totally incapable of comprehending that they cannot solve the world's greatest financial crisis by applying more of the same toxic medicine that created the problem in the first place.

The prosperity illusion

When you live in the midst of history you don't realise that you are part of making extraordinary history. Therefore most people don't understand that the last 100 years has been an extraordinary period in history and even more so the last 20-30 years. The perceived prosperity and increase in living standards have been achieved primarily through massive increases in borrowing, both by governments and by individuals. Take away the enormous debt that has been created during this period and the world would be a lot poorer. Alternatively, apply a market rate of interest on the debt. If governments had not manipulated interest rates and set them at artificially low levels, the normal forces of supply and demand would have forced rates considerably higher, most probably in double digits. The higher rates would have reduced demand for credit and thereby prevented the credit and asset bubbles that have caused the worldwide financial crisis.  In recent years, Greenspan reduced rates from 6% to 1% between the end of 2000 and 2003. And Bernanke again applied the only remedy that central bankers know, in addition to printing money, when he reduced rates from 5% to 0% between 2007 and 2008.  These people seem incapable of understanding that simple laws of supply and demand would have repaired the economy automatically without their incompetent and desperate interventions. By leaving monetary policy to market forces we would have normal recessions and minor booms that would be totally self-regulating. What the central bankers instead have created is the most enormous bubble in world history. And sadly like all bubbles, this one can only end in a disaster of a magnitude that will affect the world for a very, very long time.

So the last 100 years will be seen in history as an extraordinary period when governments thought that they had invented a new economic miracle based on unlimited credit and money printing. But sadly this miracle will be seen by future historians as another failed delusional economic theory dreamed up by politicians.

Risk of systemic failure of the financial system

The current financial crisis started due to the uncontrolled, worldwide debt and asset bubbles. The subprime defaults were just the first symptom of the lethal concoction of credit and OTC derivatives that the bankers had constructed for their own personal gain with no understanding of the risks or the consequences. Governments and central banks worldwide injected or guaranteed around $20 trillion just to save the financial system. But the only people who have benefited from this are the people who caused it. Very little of these enormous sums went into the real economy. In addition to this enormous liquidity for the benefit of the banking system, governments have allowed banks to value their assets at totally false prices not based on market values but on the hope that they will achieve full value at maturity. To further assist the banks governments worldwide have reduced interest rates to zero percent. So with trillions in fresh liquidity, zero interest rates and valuing assets at fantasy prices, many banks have produced record profits and paid record bonuses.

Money supply in the US as measured by M3 is collapsing. The chart below shows how M3 has declined almost 6% year on year. This particular indicator has been very accurate in forecasting the major economic downturns in the last 40 years and is now at the same level as before the 1970s recession.

None of the problems that caused the banking crisis in 2007-8 have been solved. They have just been swept under the carpet. In the US 140 banks failed in 2009 against 25 in 2008 and only 11 banks in the five preceding years. So far in 2010 a total of 15 banks have failed and been taken over by the FDIC (Federal Deposit Insurance Corporation). Virtually all the banks that fail show losses that are far greater than the balance sheet valuations. Of the circa 6,000 US banks, a major percentage will fail in the next few years due to rapidly declining asset values. This will also be the case for many of the major international banks. If their assets, and in particular their OTC derivatives were valued at market, very few banks would be solvent today. In addition, resets of mortgage loans, commercial real estate loans, credit card loans, private equity loans etc are all problem areas that could bring major banks down.

The risk of terrorism

Terrorism is an imponderable and it is therefore impossible to forecast where or when it could happen. With 700 US bases in 120 countries and with the US, UK and other countries' involvement in Iraq and Afghanistan, the alienation that this creates especially in the Muslim world, poses a major threat of terrorist attacks especially in the US and UK. The terrorists are almost always ahead of the intelligence agencies and security services. Therefore it is impossible to forecast how, where or when the next attack will happen. It could be planes, it could be shopping centres, or it could be a cyber war against major international computer networks. The more troops that the UK and US send to Afghanistan the higher the risks of terrorist acts against them. The greatest likelihood of preventing or reducing terrorism would be for the US and the UK to close all foreign military bases and to withdraw all troops. Sadly, that is a very remote possibility.

Markets

In January 2009 we forecast that stockmarkets were likely to correct up to 50% of the down move before continuing the bear market. The Dow Jones corrected just over 50% but it took a bit longer than we expected. The correction is now finished and the primary trend of all stockmarkets is now resuming its downtrend. We are expecting very substantial falls during 2010. This will not be a year to be invested in general equities. We expect precious metal shares to do very well even though initially they will come down with the market.

Bonds

One year ago we predicted that US long bond rates would rise. This is exactly what happened and the 30 year Treasury Bond yield went from 2.5% to 4.6% during the year. We expect US and UK bond rates to continue to rise in 2010. This will be as a result of foreign holders selling their holdings of these bonds due to the dire economic situation in the US and UK and the currencies weakening. International investors are not prepared to finance bankrupt sovereign states without getting ample reward for the risk.

Currencies

Most people judge currencies on a relative basis. This is a very poor measure of the value of a currency since it doesn't take into account the total destruction of paper money in the last 100 years. We showed in our December report ("Gold is not going up – Paper Money is going down") that most major currencies including the dollar, pound, Dmark/Euro and Yen have all declined 99% against real money – gold – since the creation of the Fed in 1913. Thus, all currencies are weak and they will continue to be attacked one at a time. Fundamentally the dollar is the weakest currency and we would expect the next leg down to start relatively soon.

The Euro also has its problems and is suffering from the problems of its weakest members – Greece, Spain, Portugal, Italy, and Ireland. Like all artificial currencies the Euro was doomed to have a relatively short life in its original form. We predicted this long before its birth in Maastricht in 1992.  Short term the European Central Bank will support Greece and all other EU nations that need support. Longer term, once too much worthless money has been printed by the ECB without solving the problems, the European Monetary Union is likely to break up.

But the current fear over Euroland and the weakness of the Euro relative to the dollar is overdone. The Euro zone budget deficit to GDP is 6.7% and debt to GDP is 88% whilst the US deficit is 10.7% and debt 92%. So on this basis it is extremely unwise to shift funds out of the Euro and into US dollars especially since the underlying fundamental problems are much greater in the US.

 

All the countries of the major trading currencies – the Dollar, Euro, Pound and Yen – have major economic problems that can only be resolved by massive money printing. This is why it is a futile game to try to predict which currency will be the weakest out of the above four. They will all weaken substantially but not at the same time. Therefore, we will have incredible volatility in currency markets in the next few years whilst speculators lose their shirts jumping from one currency to the next. There will be very few winners in that game.

So are there any currencies that are better? Yes, relatively, the Norwegian kroner, the Canadian dollar and possibly the Swiss Franc and Australian dollar will do better. The Renminbi will also do well but is difficult to invest in.

Gold

So whilst many paper currencies become virtually worthless in the next few years, gold will continue to do what it has done for 6,000 years. It will maintain its purchasing power and therefore appreciate substantially against all paper currencies.

The recent correction in gold is the weak hands getting out of speculative positions in the paper gold market. There has been virtually no selling in the physical market.

So far gold has gone up more than four times in the last ten years in a stealth market that very few investors have participated in. The table below shows the extraordinary return that investors in gold have achieved in the last 5 and 10 years. There is no other asset during this period that has given such an excellent return whilst at the same time providing the highest form of wealth protection (provided it is physical gold).

Average annual return on over 5 and 10 years

Period/Currency US Dollar Pound Euro Yen Swedish Kr.
2000 – 2005 9.7% p.a. 5.2% p.a. 2.3% p.a. 8.8% p.a. 11.0% p.a.
2005 – 2010 20.4% p.a. 25.0% p.a. 19.1% p.a. 19.2% p.a. 19.4% p.a.
2000 – 2010 15.1% p.a. 15.1% p.a. 10.7% p.a. 14.0% p.a. 15.2% p.a.

 

Return last 10 years

Over the last 10 years a US and UK investor would have made an average return on gold of 15.1% per annum.

Return last 5 years

In the last 5 years until the end of 2009, the lowest annual return on gold was in Euros with 19.1% per annum and the highest in Pounds with 25% p.a.
These are absolutely outstanding returns which most investors are totally oblivious of.
But the awareness will change in the next few years as gold rises even faster.

Many investors, including George Soros, who have missed the bull market in gold (or the bear market in paper currencies), now believe that gold is overbought and therefore it is too late to invest. The next chart disproves that theory totally. The chart shows gold in 2009 dollars adjusted for real inflation. Shadowstats.com is a superb service which analyses government statistics on a true basis, taking out all adjustments, revisions and other manipulations. Applying the true inflation rate on the gold price shows that the gold high in 1980 of $ 850 in today's terms is $ 6,400.

Governments have suppressed the gold price in the last 30 years by both overt operations (official gold sales) and covert operations (manipulations in the paper gold market and unofficial sales). Central banks are supposedly holding 30,000 tons of gold but credible estimates suggest that this figure is around 15,000 which means that 15,000 tons of central bank gold has been sold covertly to depress the price. But the effect of manipulation of any market has a limited time span, especially if it is done in connection with a total mismanagement of the economy. Central banks have now stopped official sales and China, India, Russia and many other countries are major buyers. Production is falling steadily and investment demand is soaring. With the fundamentals so much in gold's favour, it should have no problem to reach the 1980 inflation adjusted high of $ 6,400. With inflation or hyperinflation gold will go a lot higher than that.

During the next phase up in gold which we expect to start within the next few weeks, main stream investors will discover what only a few investors have understood in the last ten years, namely that physical gold is one of the very few ways to protect their assets and preserve capital.

11th February

Egon von Greyerz
matterhornassetmanagement.com
goldswitzerland.com



 

 

 

 

 

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