dms blog

From June 2nd 2012

The increase in the price of silver on Friday was not as dramatic as that of gold. I’ve already seen some comments in the media about the fact that it is the ‘industrial metal’ aspect that is weaker because the global economy is showing signs of turning down.

But we need to remember that for the past year the U.S. was supposed to be in recovery mode, and that China has ostensibly been growing in the upper single digits.

And yet the price of silver declined during this ‘recovery’ period.

Now that the economic indicators are looking very weak gold has helped to pull silver up again, within striking distance of $29.

It’s the paper spot game that has been driving the silver price up and down – ‘short and cover’ – in a mechanical and cynical weekly trading routine.

One thing is for sure, once the economic downturn takes hold base metal mining volumes will tail off and the 70% of silver output associated with those metals will likewise fall.

On the other hand I can’t see silver investor demand dropping off. If anything the fear factor will act as an accelerant.

From June 2nd 2012

Around lunchtime on Friday gold recovered its safe haven status in the U.S. During the afternoon it moved up by $66, an almost unprecedented jump, from $1550 to $1626 smashing through old resistance points like a knife through butter. Hedge funds panicked into covering exposed positions, accelerating the leap:

http://www.kitco.com/charts/livegold.html

The HUI, the gold bugs equity index, had an equally stellar day on the North American markets, up by 6.74% to 444.50:

http://finance.yahoo.com/q?s=^HUI

Similar moves were seen on the XAU:

http://finance.yahoo.com/q?s=^XAU&reco=1

Meanwhile, the DXY, that beacon of fiat safety dropped below 83 showing some distinct signs of breaking an upward pattern established for the last three months:

http://www.marketwatch.com/investing/index/DXY

So what has driven this dramatic turn?

1) The U.S. NFP came in at 69,000 less than half the 150,000 expected by the markets.

2) The U.S. Chicago PMI released on Thursday is turning down, along with other U.S. LEI’s.

3) China LEI’s are now falling; there is fear of a hard landing.

4) Europe remains a basket case, paralysed by indecision and weak leadership more prone to eternal debating society level summits.

5) Bond yields in the U.S. and U.K. are now the lowest in history. German bunds are also at similar levels and you have to pay the Swiss to hold your money.

It’s just dawned on the markets, of which the U.S. is still the biggest player, that there is nowhere else to go. If sovereign debt looks safe, you had better watch out for QE3 and a similar policy in Europe. Expect that tiny return on bonds to evaporate with inflation when the big print starts.

And don’t think that retaining funds in USD is any safer. U.S. debt is already at $15.8 trillion and will crash through the $16.2 trillion limit before the U.S. election; Obama is already sending out signals about a $20 trillion limit.

With a U.S. economy turning down, the inflationary spectre of QE3 on the horizon and an uncontrollable debt burdon, already over 100% of GDP, how long will the USD retain its status a safe haven? How many years has it got left as the globe’s primary reserve currency?

So what’s all this got to do with us?

Well gold is obviously off the starting block. The North American PM sector has already made some initial moves but the full implications of what is happening has not been completely understood within the AIM PM sector. Some of the larger players inched ahead on Friday, but nowhere near the moves seen in post-Europe-close trading on the North American markets.

Our first moves have yet to be seen.

It’s time to make a move.

Anything Condor, Ortac or Red Rock specific will be accentuated once we see a firm sector trend move up. Gold will help arrest the old decline pattern, not Greenland.

From May 30th 2012

Looks like we have a 2008 situation on our hands albeit in slow motion at this point:

DXY up as Euro plummets:

http://www.marketwatch.com/investing/index/DXY

Gold falls on paper liquidation and reversion to risk-off USD/Treasuries:

http://www.marketwatch.com/investing/index/DXY

Even Brent has dropped to 103 although supply threats probably mean that it won’t go anywhere near the $40 we saw in 2008:

http://www.livecharts.co.uk/MarketCharts/brent.php

EUR/USD ping pongs around 1.24, a long way down from the 1.30 only a couple of weeks ago:

http://www.livecharts.co.uk/ForexCharts/eurusd.php

So we are back to considering the the context and implications:

– Germany still won’t agree to a big CTL+P
– The ECB can still only provide liquidity not solvency related bailouts.
– Spain can’t afford to bail out its banking system.
– Greece runs out of money on June 20th a few days after its election.
– Greece has already run out of bank collateral which means the ECB may legally have to cut liquidity flows before the June 17th election.
– U.S. LEI’s are faltering but have not all turned down yet.

At the moment it still looks like it will be down to FED to make the CTL+P decision on June 20th. It’s looking more and more like if they don’t do something on the 20th global markets could actually implode.

Why would the FED CTL+P?

1) U.S. equity indexes are starting to decline.
2) U.S. LEI’s are faltering.
3) U.S. U3 is still at 8.2%, months before the election.
4) It’s the last chance they can do something before actions become ‘political’.
5) The DXY is already too strong as is the EUR/USD. A strong USD threatens a U.S. export led recovery and thus unemployment.
6) Additional credit swaps may be necessary to provide additional liquidity in the EZ – buying time until after the elections.
7) Black Swans a) Israel/Iran; Israel may just press the button add inflame already nervous markets. b) An Ireland surprise c) Bond vigilantes take a pop at Portugal or Italy d) Greece tax receipts plummet even further bringing forward the day the Greece current account moves into the red.

With the news that: ‘Euler Hermes, the world’s biggest trade insurer, has suspended cover for exporters shipping to Greece amid fears the debt-laden nation could be forced out of the euro, hindering Greek importers’ ability to pay their bills.’ Greece could have some real trading issues in June.

From May 27th 2012

Correct me if I’m wrong but on a combined basis (import/export) wouldn’t that be about $342bn heading straight back into the U.S.?

Where else is it going to go? Russia? Brazil? I think not.

Now $342bn doesn’t sound a lot against annualised U.S. deficits of $1.2trillion but how much of that $342bn will be in M2? In other words over the next 12 months is the U.S. about to face an inbound avalanche of inflation producing cash (and credit)?

Will the FED need to go QE3 with all this cash about to return home?

http://www.gata.org/node/11416

I don’t think the media economists have thought through the implications of this yet, given the emphasis on the Euro and the (looming) Iran issue.

Note:

one trillion Japanese yen = 12.55600 billion U.S. dollars
12.48ty + 14.78ty = 27.26ty x $12.556bn = $342.27bn gross transaction value.

From May 27th 2012

It could be a rather nervous week for the markets. There are already rumours of a Grexit next weekend, and we also have the effects of the Spanish Bankia nationalisation to wash through:

‘The comments came amid rumours – detailed by the bank of Tokyo Mitsubishi-UFJ – that a Greek exit is now imminent. The bank said there was speculation that a “planned departure” would take place over the weekend of June 2 and 3.’

http://www.telegraph.co.uk/finance/financialcrisis/9291187/Greece-faces-G

What else do we have?

– Germany is still sticking with the ‘no Eurobond’ line:

“We’re not willing to pour money into a bottomless pit,” German Interior Minister Hans-Peter Friedrich told newspaper Leipziger Volkszeitung.

– The ‘only topic of discussion in Spain is whether to switch to a German bank’ (Niall Ferguson interview):

http://www.zerohedge.com/news/are-europeans-about-start-second-half-our-great-depression

– The Greek polls have suggested a ‘no austerity’ result although the latest poll does hint at the fact that that it’s stil not a done deal:

http://in.reuters.com/article/2012/05/27/greece-election-poll-idINDEE84Q00C20120527

– The Greeks themselves are withholding tax payments as they think it will be better to pay in drachma. In other words money may run out before the June 17th election, especially if the slow bank run continues.

– Large insitutions (e.g. Lloyds) have already prepared systems for multi-currency transactions:

http://www.bbc.co.uk/news/business-18226128

– The Eurocrats ‘big idea’ is a pan-European deposit guarantee scheme but that could take weeks to sort out. Even then there is no guarantee that it will save the Euro from ‘contagion’:

http://www.telegraph.co.uk/finance/financialcrisis/9293205/Brussels-could-take-control-of-struggling-European-banks-under-secret-plans.html

I am expecting a pretty volatile week ahead. My overall sense is that the markets and people may not wait until June 17th to resolve the Greece issue.

It’s now Spain that we really have to worry about.

From May 26th 2012

The world seems to have polarised into the majority that expects Greece to leave the Euro at some point in the next few weeks or months, and those that think that Germany will cave-in and bail out all its peripheral cousins for all time.

In the red corner stands the world of Finance and in the blue corner we have the Eurocracy, the Central Banks, Jim Rickards and Niall Ferguson. The Germans of course have their heads in the red corner and their hearts in the blue.

It cannot work shout the reds; monetary union will only sustain with a single pan-European fiscal and political structure. Only when this has been achieved can true eurobonds be launched, and north to south financial transfers become a permanant feature of the Euro landscape.

It will cost too much for Greece to exit suggest the blues. Contagion will spread instantly, the economic sky will collapse, to be followed by a financial nuclear winter of misery for all. The 80% of Germans who oppose eurobonds will see sense over the next few weeks and underwrite a Merkel super-bailout in June.

Meanwhile Greece suffers. It wants the Euro but can’t afford to pay its price. Voters think that Germany will blink and that a less austere bailout package will be tabled by the end of June.

Positions appear to becoming entrenched.

Suppose that Greece votes for the Euro but against austerity as is currently expected.

And that the bailout 3 talks fail in late June, if indeed the markets don’t force a situation earlier.

What would happen if Greece decided to stay with the Euro but default on its sovereign debts?

The European and North American credit markets would certainly close, and Greece would have to live within its tax base means. But it could still retain the Euro. In other words become Montenegro. The Greek people would get what they voted for, the Euro and no bailout austerity.

I have visited Montenegro. It has some stunning coastline and a growing tourist industry particularly favoured by Russians. Other than the vast quantities of Russians the other aspect that hits you very quickly is their use of the Euro. They are not in the Euro nor do they print Euros, but they do successfully use it. And the punchline is that the EU acquiesce to its use.

What would stop Greece emulating Montenegro?

After all, the June 17th election is effectively a plebiscite on a ‘yes to the euro/no to bailout austerity’ proposition. Living within their means would be tough. But would it be tougher than having a mathematically unpayable hundreds of eurobillions round its neck for at least a generation?

And would the EU want to be seen kicking a member state out of the Euro?

Interesting times indeed.

From May 25th 2012

The BANKIA piece probably comes across as just another headline. Unfortunately it isn’t. It was only a day or two ago that we learned that the entire European inter-bank lending system is almost at stall speed.

So where is the money going to come from?

Spain the state?

Where will they get it from?

The ECB?

And how will Spain pay it back?

Even with the sponsorship of Spain, what collateral will Bankia provide in order to access the ECB’s largesse?

How many people are familiar with IAS39 or IFRS9 in the UK?

It’s the one that says if, as a bank, you hold an asset to maturity (i.e. a non-trading asset) you can leave it on the books at par.

I wonder what the fair value of the securities on the asset side of the balance sheet will be, when a realistic assessment of the bank’s loan book is made?

I wonder if we will find that some of those ‘assets to maturity’ are in fact trading assets but have not been properly disclosed?

Late night Friday downgrades associated with a further €19bn bailout requirement (possibly more).

Would you as a depositor want to leave cash in the bank on Monday?

Would you believe the assurances of a national government that could have to face more bailouts and more austerity as the ECB price for further loans. With unemployment at 24% and youth unemployment at 50% what are the chances of that government actually being around by the end of the year?

Bank runs on Monday?

And we thought Greece had a problem.

From May 22nd 2012

All eyes are currently on the June 17th election in Greece and slow but inexorable rise of Spanish bonds.

But is there anything else in the world that the markets should be reflecting upon?

What about the U.S. deficit ceiling? That $16.2 trillion limit which is supposed to last until after the U.S. presidential election, but by some calculations could be reached as early as ‘Labour Day’, September 3rd for those on this side of the pond. While this could be a pessimistic view a timeline based on a 2013 exhaustion is almost certaily optimistic. So we could be left with something in the middle; in other words just as the election rhetoric is at its zenith. What will the markets make of that?

Then there is the ‘forgotten war’, not the ones in Iraq, Afghanistan, Somalia or Sudan, but the asymmetric version being waged against Iran. The presence of two or three U.S. carrier groups in the Gulf at any one time is itself a strong message to the regime. We also have the ongoing and covert probing of infrastructure and the intermittent removal of WMD related specialists. ‘Talks’ with Iran about its weapons programme may be ongoing but could fail at any time given the lack of any track record of successes in earlier negotiations. With media attention focused on the Euro what better time could there be to prepare for a pre-emptive strike?

Could Israel be simply waiting for those negotiations to fail, formally or informally? How long will it wait for the Iranians to yield? Do they see Iran’s nuclear capability success as a 2012 event or 2013? Will they wait until the November elections to complete before taking action?

Can the U.S. and the EU maintain a hold over Israel by maintaining a ‘negotiation’ status with Iran?

How long will the Iranians be prepared to negotiate? On the one hand it may be in their interests to stretch them for as long as possible; on the other there is the question of the impact of the June/July 2012 oil sanctions.

There is also the question of China. The property bubble has burst, its export markets are faltering and many commodities have started to move into reverse. Could the ‘soft landing’ morph into the other variety over the next few months?

Japan’s economic nuclear winter rolls on. Its power reactors may have been shut down but its energy use and cost profile has moved in the opposite direction. How long will it be before the economic analysis reflects the fact that a new energy driven ‘step-up’ in costs is a permanent feature on the landscape? The often cited expected renaissance in Japanese markets now looks more like a mirage than a sanctuary for investors.

Those black swans may not yet have taken flight. Greece may be the only one in the air at the moment but it doesn’t take a major stretch of the imagination to see that single creature become an entire flock.

Indeed, by the end of the crisis we might even be talking about the appearance of ‘gold swans’ or ‘silver swans’ in the grey and gloomy economic twilight.

From May 19th 2012

Sentiment appears to be on the move.

Let’s look at some dates, the first being the 2012 FOMC meeting calendar:

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

We have meetings scheduled for June 19th and June 20th. The one after that is right at the end of July/beginning of August. In other words it’s just before the the silly season prelude to the November 6th U.S. presidential election:

http://en.wikipedia.org/wiki/United_States_presidential_election,_2012

Meanwhile, over in Europe we have June 17th Greek election, possibly the most watched election of the 21st Century, looming.

Over in the U.S. the economic indicators, while still positive, are showing some signs of weakening. And of course U.S. U3 headline unemployment at 8.1% is masking a U6 of 14.5%, itself flattered by years of calculation changes:

http://portalseven.com/employment/unemployment_rate_u6.jsp

Shadowstats still place real U.S. unemployment on a consistently calculated basis in the low 20%’s.

So we have a convergence of drivers emerging which appear to be focusing on late June:

1) In the U.S. the economic indicators are faltering, unemployment remains at politically unacceptable levels and a U.S. election is rapidly coming down stream. The FED will not want to attract political criticism by announcing measures during an election campaign. The window of opportunity is therefore shrinking fast.

We also have the ongoing trillion USD deficits and the need to fund them, given that China now prefers gold to U.S. treasuries. Around that time Operation Twist also ends, and the market expects something on that basis alone.

2) Meanwhile in Europe the markets shiver with fear at the prospect of the losses the banking sector will face as a Greek exit catalyses another default. The Greeks still look like they are prepared to play the Mexican stand-off game and vote-in anti-austerity political groups. By June 18th the markets could move into complete panic as soon as the uncertainty of the vote outcome is replaced with a conviction that the only outcome will be a new Drachma.

We therefore have that June 18th to June 20th period when the markets are in turmoil, coinciding with an FOMC meeting, and almost certainly with currently unscheduled but inevitable ECB, Eurocrat and Hollande/Merket summits.

The FED will have its drivers and the Euopeans will have theirs. There will be a convergence of interests, and probably ‘solutions’.

A pan-global nuclear level injection of liquidity into the global financial system, associated with global QE at levels we have not see before. All major central banks will participate. No one will want to be the currency that remains too strong in a sea of printing. China especially will not want to compound its already faltering growth with an even stronger exchange rate.

Whether Greece stays in or ultimately leaves, the markets will not wait. The fear factor will have to be addressed with something or Europe will be left with all the market effects of a Greece exit, but without the actual catalyst.

Whatever happens the action will need to be large enough to dissuade the markets from transferring their attention to Spain, Portugal, Ireland, or even Italy.

Doing nothing, either in the U.S. or Europe does not look like a viable option.

And time is rapidly running out.

From May 19th 2012

After yet another week of self-inflicted turmoil the continental europeans continue to choose the option of trying to talk their way through the crisis. The markets are mercilessly punishing any sign of weakness as fear overwhelms rational thinking. And very slowly, ordinary Greeks and Spanish citizens have started to realise that financial Eurogeddon could be just around the corner. The more senior bankers try to calm the markets and their respective populace, the more distrustful the traders and people seem to become. ‘I’ll take my money, thanks very much’ is no longer the cry of the relieved wealthy, who long ago moved their precious Euros into a safer home at the European core, in Switzerland or in U.S. dollars.

So Greece is left with two options:

Stay in the Euro and face a decade or two of ‘austerity’, an almost permanently depressed economy featuring high unemployment and generally falling living standards.

Or an exit from the Euro, the reintroduction of the Drachma and a probable immediate significant decline in wealth. Instant economic pain, but with the possibility of recovery in a few short years.

Either way it will mean pain.

The Eurocrats and politicians think they can frighten Greece into voting-in a ‘pro-bailout’ political group. Meanwhile, the ascending Greek left think they can terrify the European core with the financial implications of a ‘Grexit’.

So what happens next?

It looks like the average Greek thinks that Europe will blink. Those that are already out of work can’t really see how much worse their situation can get. After all, whatever the outcome, you can’t lose a job that you don’t have. So June 17th will probably see an anti-austerity government assume control, with an inevitable battle of wills ensuing shortly afterwords. Mild compromises will be made by the Eurocrats which will not satisy the newly elected local political alliance. We will have a stand-off in the immediate post election period.

The markets know this.

The Greek people probably suspect this.

So the real question is whether Greece will survive within the Euro until June 17th. Will the Greek people continue to withdraw deposits from the already stressed banking system?

Probably.

It’s simply a question of time.

Either way the Eurocrats, European politicians and ECB have some decisions to make. Do they make a move before the election, or wait until afterwards?

If Greece stays within the Euro, the ECB will have to back down and Europe will effectively have to give Greece an unlimited credit line on very easy terms. The German taxpayer will not like this at all. It will effectively mean LTRO/printing and a relaxation of austerity, not just for Greece but for the whole Eurozone. In other words a big reflation, big enough to take the fear from the markets.

If Greece leaves, the markets will ‘frazzle’. Abject panic will be instant as Greece acts as a catalyst, a sovereign Lehman moment. A collective financial nuclear event will be required that dwarfs anything seen previously, something that is so large that it washes through the markets like a nuclear hurricane, in strength and effect. All the world’s central banks will need to act in unison with a massive injection of liquidity, the FED, ECB, BOJ, BOE, BOC and possibly some of the smaller banks.

It would calm the markets but switch attention to the fear of inflation. Gold and other risk assets will react. Equities associated with gold will reverse their seventeen month declines and resume their eleven year bull market trend. We could soon see the old $1900 high taken out as fear of market panic is supplanted by a fear of hyperinflation.

OIl and other commodities will also advance as inflationary fears drive prices into areas that reflect the larger base of global money supply rather than demand.

Consumer prices will eventually increase. Perhaps by then the average U.S., U.K. and European citizen will have started to follow Asians by buying hard currencies as protection against value erosion.

Then in 2013 we have the U.S. ‘fiscal cliff’, the 40% or so increase in U.S. taxes that currently waits in the pipeline.

The U.S. debt mountain will be moving towards $17 trillion.

And the world and the markets will turn their attention to the real story, the elephant in the room that hasn’t been noticed while Europe implodes.

How will the U.S. pay its debt back?