International Forecaster September 2011 (#7) – Gold, Silver, Economy + More
By: Bob Chapman
Monday, 26 September 2011
The question plays out on three fronts. England quietly is immersed in its own financial problems, churning out their version of quantitative easing, as the US FOMC meeting rises in the distance for two days this time.
Will we get the twist? Of course we will. If we do not the bottom will fall out. That will signify the issuance of more funds plus what is needed to purchase some 80% of Treasury securities, or about another $850 billion. It is no secret that the Fed, Bank of England, Bank of Japan and the Swiss national Banks are going to provide dollars to European banks that are the victims of American lenders who have pulled their funds out of Europe for fear of losing their investments. They are phasing out an orderly fashion. The commitments of these central banks are doing three things putting their citizens at more financial risk; driving inflation higher; aiding in the increase in gold prices and following a path they already know is doomed to failure. The players did not want a replay of the Lehman Affair of just three years ago, or the ongoing immediate consequences. Everyone wanted to look like they were in motion, that they were doing something about the problem. The underlying problem is that banks in Europe cannot issue much more debt or they will look like bigger fools than they already are. Due to the banks poor choices in the past these banks are on the edge of failure and were Greece to default they’d get closer to the edge. If all insolvent nations were to default these banks would all go under. Thus, we see another bank bailout engineered by the Fed and other central banks. As this new crisis unfolds the European and world economies are slowing down, which will compound problems.
Under the best of circumstances the European banks and sovereigns will lose half of their investments in Greek bonds and loans. We stated two years ago the 100% default is the only answer for Greece and the other five problem countries. The losses would then be $4 to $6 trillion. Not only are many European banks already insolvent, but also the future portends a bank wipeout. The banks did everything wrong expecting as always a taxpayer bailout. In addition in this process these banks assumed leverage of about 30% in an attempt to raise profits. If these banks do not go under they will be nationalized and again the public will be allowed to assume again the banker’s losses. This crisis already in motion is going to be worse than the one experienced three years ago and its mutating into an ongoing crisis, because no one is willing to purge the system. In the wings we see the ECB, which already has made an illegal foray into the bond market to purchase Italian and Spanish bonds. The big question there is who is going to pay for their purchases? We will find that out on September 29th when the German Bundestag votes on German participation. If they say no the European financial world will go upside down. If they vote yes we could see anarchy in Germany. As we have cited often European countries are a collection of different tribes that do not like to be forced into anything. At this juncture we are told by our sources that the funding bill will be passed. If not passed, we could see military action between Greece, Israel and Turkey, as a deliberate diversion to force European countries to fund Greece and other bailouts. When in doubt have another war.
The US Treasury Secretary Mr. Geithner managed to make a fool of himself in Poland, but did find support among other elitists regarding the regulation and full implementation of banking federalization. This supposedly is needed to mitigate the crisis and prevent future confusion, when in fact it is a move to remove the sovereignty of member states. The Fed, that endless source of swaps, money and credit, would supply recapitalization. Trillions of dollars can easily be conjured up for just about anything and especially to further a European Federal Reserve. The upshot of this move would be to give the ECB or another authority the ability to create money and credit at will, which is totally apposed by the Germans. In total they do not want anyone telling them what to do especially after the mess in part created by the ECB. This is a war the internationalists cannot win, but they will try anyway.
These attempts at centralization and federalization are not what the Germans want. They want something similar to the Bundesbank and they want direct control via representation. What has transpired is another bailout for Europe via the Fed, BoJ, BoE and the SNB. That certainly spells much more inflation as a consequence of this policy, which is something Germany is dead set against. The newest swap facility is for 45 days, so that the ECB would convince US and other money market funds and other large investors to repurchase the banks’, notes and bills of EU banks and government, of course with the aid and pressure of the Fed and the US Treasury. There were strong reasons for American lenders to pull out of euro zone short-term paper markets. It is called risk-reward. Higher yields are desperately needed by money managers, but not at the risk of losing capital. Just look at the correction in the US commercial paper market, nine-weeks of rising yields and plunging participation. In fact, such policies are really a QE 3 in motion although concentrated on Europe. The absence of such backdoor financing had to make players realize that funds were needed quickly, because without them there would have been another European banking crisis that would have spread into the UK and US markets. The European economies are slowing down and in the absence of such a move the downside would have accelerated into a large recession or depression. The only way the Fed can operate such a swap would be with freshly minted money, because if they buy dollars in the Forex market they would drive the dollar higher and the euro lower and they do not want that to happen. The Fed is well aware that some European banks and sovereigns are insolvent, as is the US system and by using such policies they keep the whole structure functioning and buying valuable time. Default is on the way and all the players know that. They want to be sure it is an orderly default. The same is true of currencies. They want a big meeting where all currencies are revalued and devalued simultaneously and where multilateral defaults go smoothly. From a liquidity viewpoint European banks have bought 45 days to November 5th. We do not think that is enough time and that the swaps, QE 3, will be extended through the end of the year.
While this goes on the twist will take place in the US that is holding short-term rates static and deliberately lowering long-term rates by manipulating the markets. We are afraid that will cause upward pressure on short-term rates. The resultant lower rates are to encourage economic activity, investment, and revival in the real estate market. On the short end it is not going to happen. Rates will rise and bank leverage will be neutralized. All those months of riskless profits will end at least temporarily. Lower mortgage rates are fine, but suppressing long-term yields is a mistake. These moves are inflationary and we now see that an official CPI of plus 3.8%. Real inflation is 11.4%. They are the highest in two years and we predicted more than a year ago real inflation will match that of three years ago of 14%. We find it astounding that people are dumb enough to buy a 10-year note yielding 1.83% in an 11.4% inflationary environment and deliberately lose 9.4%. In 10-years almost all your purchasing power is gone. It is a small wonder that people are resorting to gold and silver coins, bullion and shares.
In Europe September 29th is a big day. On that day the Bundestag will decide whether to approve another Greek bailout. Our sources say they will approve it, although anything could happen. If this crisis passes over the next three months there will be a rush to pass legislation to allow the ECB to issue bonds. Once accomplished that would give the ECB the money and credit creating powers of the Fed and that would allow the ECB to stretch the problem out over a number of years. These moves might solve the current liquidity crisis, but they won’t solve the solvency crisis. It is difficulty to tell how long this sort of bailout will go on and how difficult the problems will be. One thing is for sure inflation will rage and many nations will not want to subsidize others indefinitely. This will be especially true in smaller nations. The goal by the ruling EU in Brussels will be to totally control the entire 27 nations involved. Can this be accomplished? We do not know, but we do know it will be very difficult to accomplish.
While Mrs. Merkel, German Chancellor, sees nothing suggesting a recession in Germany, the government is maneuvering behind the backs of its citizens to give unlimited power to the EFSF, the European Financial Stability Facility, which is not a legitimate entity, to support the hopelessly bankrupt euro system at the expense of German taxpayers and the common good. This facility will strip Germany and all other participants of their sovereignty in its process of handling one facet of euro zone finance. The $500 billion in Swaps and the eventual bond issuance will guarantee much higher inflation. Europe’s present problems are going to make the 2008 Lehman episode look like a walk in the park. The pooling of the debt burden and a further easing of monetary policy threatens to weaken the institutional framework of the EU.
German finance minister Wolfgang Schäuble, who resides in the back pocket of the bankers has proposed a doubling of funds to be made available to the bankrupt sovereigns of just over $1 trillion. On September 29th the banker’s idea is to have the Bundestag the EFSF carte blanche to carry out measures to save the euro, the insolvent countries and banks. If that were passed, all control passes to the EFSF and the ECB. We believe that most Germans and selective others are finally realizing that Brussels is the enemy.
The passage of legislation by Germany, which in part has already been passed by the Bundesrat (Senate) would leave Germany with no more say on the use or increase in funding just to save the euro, Greece and the other five countries, which is an impossible task at a cost of $4 to $6 trillion. What the Bundestag does on 9/29/11 will dictate the future of Germany as an industrial and social nation far into the futures. Will it be enslavement to the EFSF or freedom to run its own affairs? This amounts to a coup d’état. Coming on the heels of abject failure to solve the economic problems of the insolvent six countries.
What is happening in Europe, and particularly in Germany, is beyond belief – a plan to prop up the hopelessly bankrupt financial states through deregulation of the financial sector. If legislation allow all this to happen you could have revolution in Germany and other countries. It is a frightful situation.
Back in April, the Financial Stability Board (FSB), an international super-regulator, wrote a prescient if less than catchily-titled paper “Potential financial stability issues arising from recent trends in Exchange Traded Funds (ETFs)”.
Its central warning – that ETFs are not the cheap and transparent vehicles the marketers would have us believe – was spot on. When UBS’s $2bn black hole hit the screens on Thursday, no one who read the FSB report was surprised to see the words ETF and rogue trader in the same sentence.
The past ten years have seen an explosion in the popularity of ETFs. In part this reflects some of their acknowledged benefits – relatively low costs and the ability for investors to trade them throughout the day. A third claim, that ETFs are simple products, may once have been true but it no longer holds water. Many of these funds are now fiendishly complicated and way beyond the comprehension of the individual investors and professionals alike who are buying them.
Here are just a few of the reasons why ETFs are not all they are cracked up to be.
First, around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla “full replication” ETFs which do, 45pc of the market is in the form of so-called “swap-based” ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.
Derivative trades add a second layer of uncertainty to the unavoidable ups and downs of the market, the counterparty risk that the organisation on the other side of the contract might go bust. Even worse, the provider of the ETF might sometimes be a part of the same organization as the derivatives desk carrying out the swap.
When a bank acts in this dual capacity, and because of inadequate disclosure rules, there is a significant potential for a conflict of interest in which the end investor comes off second best. Because there is currently no obligation for the basket of assets used as collateral to actually match the assets the ETF purports to be tracking, a bank may choose to hold less liquid assets to back the fund which it could struggle to sell if too many investors want out at the same time.
The problem of liquidity is an increasing issue with ETFs because of the way in which the funds have branched out into other asset classes such as fixed income and commodities. In these markets, liquidity is typically thinner than in big equity markets such as those measured by the S&P 500 or FTSE 100.
Liquidity is only ever a problem at times of market stress. Unfortunately, that is precisely the time when it matters, as investors in some real-estate unit trusts discovered a few years back when the property market turned down and, funnily enough, their managers were unable to sell enough properties to pay back redeeming unit holders. Investors were locked in.
A big unrecognised risk with ETFs is related to the ease with which traders – hedge funds in particular – are able to use the funds to short markets. For reasons which I’m not sure I could explain even if I had the space, it is possible for the number of shares sold short in an ETF to massively exceed the actual number of shares available. It has been suggested that the “Flash Crash” of May 2010, in which US shares fell 1,000 points before bouncing back in a matter of minutes, was a consequence of this – around 70pc of cancelled trades at the time were reported to be for ETFs.
Like many financial innovations – most obviously, the alphabet soup of mortgage-related debt obligations that triggered the financial crisis – ETFs started out as a good idea, and for some investors, in their most transparent form, they remain so. But, as so often in the financial services industry, a tangled web of complexity has rapidly developed. What was once a straight-forward means of gaining access to a market has turned into a minefield for investors and one which, as UBS discovered in the middle of the night last week, has the potential to become the next toxic scandal.
GOLD, SILVER, PLATINUM AND PALADIUM
Early on Wednesday gold traded up around $5.00 and silver plus $0.36. The first attack came as usual at 6:48 a.m. EDT. From there both traded about even. Gold traded at $1,810.00 and after the Fed announcement fell to $1,790.00. The twist was ill received in the market and bombed thus your government attacked gold, silver and commodities, while trying to hold up the market. That was accompanied by a Moody’s downgrade of Bank of America, which deeply affected financial stocks. The Treasury intends to purchase $400 billion of Treasury securities from 6 to 30 year’s duration and sell an equal amount of securities under three years to support the mortgage market where 30-year fixed rates are 4.09% currently. This is QE 3 to go along with the $300 billion they already rolled between June and September. Trailing along behind to help the Fed, the Bank of England said it was ready to pump more money into its economy and Norway said it won’t raise interest rates. These will assist the Fed, which could push investors in riskier assets, such as stocks and corporate bonds. A fall in the Dow today was not what they expected. This is the most aggressive monetary easing over the past three years and in US history.
Moody’s not only downgraded Bank of America, but Wells Fargo and Citigroup as well.
Gold open interest fell 3,177 contracts to 499,356 and silver OI fell 387 to 112,103.
ShopperTrak said in a new forecast that natural retail sales will rise just 3% during November and December vs. 4.1% yoy. The International Council of Shopping Centers says the same thing.
In a survey by Alix Partners 41% planned on spending less on holiday shopping this year, up from 31% yoy.
After 5 years of a housing depression the experts have finally figured it out and said the economy will depress housing prices for years. They expect prices to fall 2.5% this year and 1.1% annually through 2015. Housing prices have already fallen 31.6% from the 2005 peak.
The Rand Refinery says they are selling more Krugerrands to Germany than ever before, or 50,000 a week. They are predicting sales of 150 tons of gold bullion to China or 400 tons a year, versus 240 tons yoy.
The Royal Canadian Mint is set to sell 30% more silver Maple Leaf coins than last year, a record. That will overtake the American Eagles as the world’s top gold bullion coin.
We get asked over and over again when will the gold, silver cartel be broken. We believe it happened in July and August. Physical demand is overwhelming paper selling. On September 1st, gold and silver shares came under accumulation for the first time in three years.
Thursday morning started poorly with gold off $40.00 to $50.00 and silver down $1.55 to $2.45. It got worse as the day wore on as government and margin calls took their toll.
Spot gold closed down $66.30 to $1,739.20, as December fell $69.90. It recovered some $10.00 in the access market. Spot silver fell $3.82 to $36.54, as December fell $$4.53 to $35.93. The XAU fell 16.69 to 197.11 and the HUI fell 47.01 to 564.34. The market should turn back to the upside at least by next week. There is gold and silver options but because of the sharps drops it will be a non-event. It was all-bad but recovery is just around the corner. Just be patient. The Wall Street crowd was disappointed with “Operation Twist” being QE 3. There is lots of fighting going on in Wall Street and at the Fed, which we are not being told about. This was a compromise and it turned out disastrously. In the long haul the Fed is going to have to do more, that is within this next year, and the administration will be pushing hard for more stimuli. All that is very good for gold and silver and much higher prices, because inflation will be headed much higher. Gold open interest fell 1,607 contracts to 497,749, as silver OI fell 550 contracts to 111,553.
The Bloomberg Consumer Comfort Index fell to minus 52.1 from 49.3 the prior week.
The 100 largest pension plans of public US companies have assets covering only 79% of their liabilities at the end of August, down from 86% at the end of 2010.
On Friday the Illuminati was more brazen and arrogant than ever. They increased gold margins 21%, silver by 16% and copper by 18%, after having knocked down prices in gold from $1,928 to $1,637.50, or by $290.50, but obviously that was not enough. It is unbelievable that criminality is allowed to flourish in our country. There was absolutely no reason for margin increases. This is absolutely despicable. There should be a congressional investigation and criminal charges brought against these crooks. The spot gold price fell $101.70 to $1,637.50, as December fell $80.70 to $1,661.00. The spot silver price fell $6.49 to $30.05, as December fell $5.37 to $31.20. That is what the CME and COMEX call an orderly market. This is simply unbelievable. After 53 years, as one of the experts in this field, we cannot believe they have done such a dastardly thing. Contact every Senator and representative and tell them what you think. At 1:00 a.m. EDT the attack had begun just as we finished the George Noory program on Coast-to-Coast AM. It continued all day because all the inside players knew ahead of the public that margin requirements would be raised. Gold and silver were deliberately forced down outrageously, as it becomes clearer that they were very serious problems ahead and that Europe and the US would have to print trillions of dollars to stabilize deteriorating markets, banks and sovereign countries. The destruction of gold and silver on the 3rd try was mandatory as a cover operation. Financially Europe is in a state of collapse.
The COT, Commitment of Traders Report, saw silver commercials increase net longs by 657 contracts. On the gold side they increased longs by 1,666 contracts. The XAU fell 8.19 to 188.92 and the HUI fell 27.85 to 536.40. Moody’s downgraded 8 Greek banks due to the impairment of Greek government bonds and the increasing risk of significant additional impairment of GGBS, on banks capital levels. In plain English the banks are broke. As we reported earlier regarding the secret EU report leaded by German finance minister Schäuble, the ECB says the bailout fund needs at least $1 trillion due to the deepening Greek crisis. We forecast that the $500 billion swap would be followed by $1 to $2 trillion in the European bailout. The ECB is now recommending $2 trillion. This will be printed up by the Fed. The Fed will also try to pull more rabbits out of the hat. The twist has already been identified as a headwind facing bank lending. In addition pension funds will be hurt by low long-term interest rates. That will prove negative to underlying assets. What a nightmare.
Gold open interest fell 8,161 contracts to 489,588 and silver OI fell 768 to a new multi-year low.
There is now more market speculation now than in 2008. Spec contracts grew 64% in energy contracts and 20% in agriculture and metals.
Wall Street, the City of London and other global bankers are shaken by the refusal of the Fed to issue QE 3.
The IMF says China’s domestic loans have risen to 173% of GDP and they fear losses of $1.7 trillion in local government debt. This is worsening China’s public debt.
Insiders in the Greek government see a 50% haircut on debt, which is foolish. They need to go 100%.
IMF, Illuminist director Christine Legarde is already voicing preference for a merger of the ECB and the EFSF, as a quicker way to achieve world government. US Treasury Secretary Geithner has previously suggested the idea. This is where this is all headed. Never waste a crisis.