Oct 31

Solutions for Everything, Answers to Nothing

Gold Price Comments Off on Solutions for Everything, Answers to Nothing
Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Oct 29

QE Finished, Gold Fans Clearly Crackpots

Gold Price Comments Off on QE Finished, Gold Fans Clearly Crackpots
The US Fed just ended quantitative easing. Anyone thinking history or gold worth a look must be a crackpot for worrying…
 

TIME WAS the Gold Standard simply existed…like rain or snooker tables, writes Adrian Ash at BullionVault
 
Zero rates and quantitative easing are the monetary equivalents today. Doing anything else puts a cental bank into the “hall of shame” according to Bloomberg. The Financial Times gasps that today the US Fed’s “grand experiment is drawing to a close…”
 
Oh yeah? The world hasn’t yet seen the last of US quantitative easing, we think. Not by a long chalk. QE is getting new life after 15 years in Japan, the world’s fourth largest economy, and it has barely begun in the single largest, the Eurozone. 
 
Only China to go, and the QE Standard will be truly global. But financial markets and pricing mechanisms the world over are already through the looking glass. After $3 trillion of US Fed asset purchases, climbing back to the other side will take more than a month’s rest from extra money printing. 
 
The Gold Standard, meantime, now exists only to fill space when financial hacks run out of other silly things to talk about. 
 
Take this classic Phil Space nonsense, for instance, from the Washington Post.
 
To recap… 
 
Over a week ago, billionaire tech-stock investor and former PayPal boss Peter Thiel appeared on right-wing shock jock Glenn Beck’s TV show. He mumbled something about the value of money…reality…and the virtual world of monetary politics we’ve all lived in since 1971. 
 
Nothing to see or hear in that. Even the laziest gold bug can see US president Nixon’s decision to end the Dollar’s gold link changed nothing and everything all at once. Metaphysical mumblings are the best anyone’s since managed in trying to understand how humanity got beyond itself in that moment.
 
Yet on Friday, Thiel’s comments were picked up by a right-leaning think tank blogger…and finally last night, this “unthink” piece appeared at the Washington Post online. 
 
So what? Well, George Selgin, new Cato Institute director, said earlier this month that anyone challenging the way money currently works must do better if they want to be taken seriously. Amateur bug-o-sphere stuff only makes things worse.
 
But Selgin underplayed the task ahead, I fear. QE, zero rates and unlimited money-supply growth are big, important issues. Today’s US Fed meeting proved that once again. 
 
On the other side of the debate however, even the most qualified and serious economist daring to doubt the sanity of printing money to buy up government debt, mortgages, stocks or other nation’s currencies now looks like a “crackpot” to most politicians, financiers and reporters today.
 
Because, hey! Nothing bad has happened. No inflation, currency destruction or financial apocalypse fuelled by money-from-nowhere. 
 
Not yet. And now the Fed is turning off the taps. For now.
 
What could possibly go wrong? We must be crazy to bother owning gold as financial insurance, never mind worrying about how money itself…as basic to civilization as the written word…is being bent and remade in the latest central-bank experiments.
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Oct 13

FT’s Martin Wolf in "Not Wrong" Shocker

Gold Price Comments Off on FT’s Martin Wolf in "Not Wrong" Shocker
Today’s debt bubble is a real problem, says a key cheerleader…
 

AS WE predicted, volatility is rising. Investors are beginning to squirm, writes Bill Bonner in his Diary of a Rogue Economist.
 
Why?
 
The Fed is ending QE. And it could hike short-term interest rates as soon as next year. The EZ money is getting scarce.
“We are trapped in a cycle of credit booms,” writes Martin Wolf in the Financial Times.
Wolf is wrong about most things. But he is not wrong about this.
“On the whole,” he writes, “there has been no aggregate deleveraging since 2008.”
Wolf does not mention his supporting role in this failure. When the financial world went into a tailspin, caused by too much debt, in 2008, he joined the panic – urging the authorities to take action!
 
As a faithful and long-suffering reader of the FT, we recall how Wolf howled against “austerity” in all its forms.
 
His solution to the debt crisis?
 
Bailouts! Stimulus! Deficits! In short, more debt!
 
Since then, only America’s household and financial sectors have deleveraged…and only slightly. Businesses and government have added to their debt.
 
Overall, the world has much more debt than it did six years ago – more than $100 trillion worth.
 
Wolf has come to realize where his own misguided policy suggestions lead.
 
As a recent paper by banking think tank the International Center for Monetary and Banking Studies put it, fighting a debt crisis with more debt leads to a “poisonous combination of higher and higher debt and slow and slowing real growth.”
 
That is the world we live in. Thanks a lot, Martin.
 
The future is a blank slate. It whacks us all – but differently, depending on how exposed we are. What can we do but try to protect our backs…and squint, peering through the glass darkly ahead.
“These credit booms did not come out of nowhere,” writes Wolf. “They are the outcome of previous policies adopted to sustain demand as previous bubbles collapsed.”
Why sustain unsustainable demand? Why not just let the bubble collapse?
 
Under oath in a New York courtroom, two former US secretaries of the Treasury have told us why.
 
Not bailing out AIG would have been “catastrophic,” said Hank Paulson on Monday. A failure of AIG would have led to “mass panic,” chimed in Timothy Geithner on Tuesday.
 
At least they had their story straight. But it is not hard to connect the dots. When a credit bubble pops, it causes fear and panic. The authorities take action to stop it.
 
What can they do?
 
Whatever it takes, is their answer.
 
What does it take to stop a deflating credit bubble?
 
More money! More credit! More debt!
“We need to escape this grim and apparently relentless cycle,” Wolf concludes.
Meanwhile, “IMF warns of third Euro-zone recession since financial crisis,” reports the FT elsewhere.
 
The IMF also downgraded its forecast for world GDP growth to 3.3%.
 
High debt. Slow growth. And another colossal crisis coming.
 
No wonder investors are nervous.
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Oct 01

Gold Prices Killed by Not-So "Super" Dollar

Gold Price Comments Off on Gold Prices Killed by Not-So "Super" Dollar
Gold prices have been hammered by the rising US Dollar. What might October hold…?
 

DOLLAR UP, gold down, writes Adrian Ash at BullionVault.
 
That’s pretty much the lesson for precious metals investors looking at any long-term rise in the US Dollar since exchange rates began floating in 1973.
 
And now in late 2014, says former chief economist at Swiss bank UBS, George Magnus “It looks as though the third US Dollar uptrend of the post-Bretton Woods era may be underway.” Just so long as you also ignore his warning against “extrapolating” short-term noise into long-term forecasts…
Gold price vs. US Dollar Index, 1973 to 2014, daily data
Might Magnus be right? For gold prices, as the chart shows, it’s less the absolute level than the Dollar’s direction of travel that counts. Starting from all-time lows in spring 2011, today’s greenback hardly matches the “Super Dollar” of the early 1980s. Yet the background rhymes…
  • Commodities glut after a long bull market? Check…
  • Disinflation in consumer prices? Check…
  • Weak competitor economies in Europe? Check…
  • Over-borrowed emerging markets? Check…
  • Strong US monetary policy, raising rates on the Dollar? Well, no. Not by a long way.
Even with the Federal Reserve still sticking however to its “considerable” delay for raising rates from zero, the third-quarter of 2014 proved ugly for Dollar investors holding non-US assets.
 
Gold for US investors marked the end of Q3 by hitting new 2014 lows, losing 5.8% on the London PM Fix for the month of September alone. Silver fell to the lowest Dollar price since May 2010…down more than 12% from the end of August.
 
Yet gold priced in Euros, in contrast, remains near the top of its 12-month range. Even in the British Pound…flattered by Tuesday’s GDP revisions…gold has held 3% higher from New Year.
 
Gold’s recent drop, in other words, is entirely relative. And this split between Dollar and non-Dollar gold prices might widen in October.
 
First there is the European Central Bank’s meeting concluding Thursday. Mario Draghi and his team have long hinted at some kind of QE-style money printing. The latest inflation print of just 0.3% per year across the 18-nation union will loom large.
 
Then, in the last week of October, the US Federal Reserve will face the opposite problem. It is set to taper the last $15 billion of its monthly QE printing. That leaves rising inflation, and strong GDP, begging for an end to the “extended time” promised for zero US interest rates. 
 
Before then, we’ve got US jobs data Friday (with an early look in ADP’s private-sector estimate mid-week). Then, mid-month, the European Court of Justice will hear a legal challenge to the Eurozone central bank’s Outright Monetary Transactions (OMT)…the 2012 plan which finally stemmed the single currency’s debt crisis. 
 
Mario Draghi hasn’t actually fired any OMT money at weak-economy bonds yet. But if the Court decides the plan is illegal (insomniacs will enjoy reading the arguments here. Or better still here) it could spark fresh panic…out of Greek, Spanish and other debt-heavy markets…pulling the Euro lower again. 
 
Analysts are of course aligned with the Euro bears betting against the currency in the forex market. Barclays Bank today cut its 12-month forecast for EUR/USD from $1.25 to $1.10 – a move which, if matched by the Dollar’s other major crosses, would take the trade-weighted index to a decade high of 90 or so. Gold prices in 2004 were trading below $400 per ounce. So a blunt analysis, never mind the momentum in gold futures and options betting, says a fall in the Euro must push bullion prices lower again as the US Dollar surges. After all, it worked like clockwork in the other direction.
 
Gold up, Dollar down” was so solid between 2002 and 2008, it became a no-brainer trade for no-brain hedge funds. The US currency fell 30% against its major trading peers on the forex market. Gold meantime rose 160% in Dollar terms. But this relationship broke down during the financial crisis. Because gold kept rising…and rising…while the Dollar whipped higher.
 
What are the odds today? Playing the averages, and reviewing the last 40 years (daily data, 12-month change), gold has been twice as likely to rise when the US currency is weakening on the forex market than when the Dollar Index is getting stronger. And when gold drops hard…down 10% or more from 12 months before…the Dollar has been rising 91% of the time.
 
No-brain traders are betting this rule-of-thumb will hold firm as 2014 ends, and gold will keep falling in Dollar terms as the US currency gains versus the Euro, Yen, Pound and the rest. 
 
But watch out. Because since 1974, gold and the Dollar have also moved in the same direction some 30% of the time. And when gold rises as the Dollar also goes up (21% of the last 40 years), its gains have been markedly better on average than when the Dollar is falling. 
 
Yes, really. When gold has risen against a background of Dollar strength, gold priced in Dollars has gained 24% year-on-year on average. It’s averaged 18% gains when the Dollar’s been falling. 
 
Of course, investors tend to buy gold and the Dollar together when crisis hits. Not only, but not always either. You could cite any number of crises where gold failed to rise with the Dollar, and pitch them against the gold price surge of Soviet Russia invading Afghanistan in 1979, the 2008 Lehmans crash, or the 2010 Eurozone meltdown.
 
Never mind if those events sound at all familiar here in late 2014. Ignore the fact that a rising Dollar…plus rising gold…adds up to 30% more fun for non-US investors trying to defend their money against crisis. Financial markets have avoided seeing any trouble ahead all year. So far. As an investment banker puts it to the Financial Times today…applauding this year’s surge in global mergers and acquisitions…”I have never seen a market more resilient than it is today, in terms of absorbing geopolitical and financial risk.”
 
Such complacency is the reason gold investing exists, whatever the outlook for the Dollar (and “Everything seems to be Dollar positive,” says another forex strategist…also tempting fate).
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Sep 02

About That GDP Revision

Gold Price Comments Off on About That GDP Revision
Strong GDP data hide the failure of QE and zero rates to juice the real economy…
 

The FIRST REVISION of the GDP numbers for the second quarter wasn’t what we expected, says Bill Bonner in his Diary of a Rogue Economist.
 
We expected the data to show substantial weakness. Instead, they show what looks like strength. The US economy expanded at a 4.2% rate in the second quarter, adjusted for inflation.
 
The economy may be growing. Stocks may be near a record high. But the typical American owns no stocks and his prospects are depressing. Here is a report from the New York Times:
“For five years, the United States economy has been expanding at a steady clip, the stock market soaring, the headlines filled with talk of recovery. Yet public opinion polling shows most Americans still think the economy is pretty miserable.
 
“What might account for the paradox? New data from a research firm offers a simple, frustrating answer: Middle-class American families’ income is lower now, when adjusted for inflation, than when the recovery began half a decade ago.”
This is hardly news to us. We’ve been following the real economy – as best we could – for the last 15 years. Dear readers already know household income, hourly wages and household wealth were all down – for most people.
 
The averages are distorted by the few at the very top, but the typical American suffered a big plunge in wealth in 2008-09…and has never recovered. In fact, he is worse off today than he was at the bottom of the hole in 2009.
 
In June of that year, according to Sentier Research, the median family earned $55,589. Today, that figure is $53,891, adjusted for inflation. That “median” family is right at the middle of all US households. So, half of the people you see on the streets or in the shopping malls have suffered even bigger income losses.
 
But it wasn’t just the damage done by the crisis of 2008-09 that has lowered incomes. The problem is bigger, deeper. It’s the core defect in the debt-fueled growth model.
 
As we explore in our new book, Hormegeddon, a little bit of debt may be a good thing. But add more, and it depresses growth. Keep adding debt, and the whole shebang blows up.
 
Sentier’s numbers show the deterioration in household income began at least 14 years ago. Today, the typical middle-income family earns less than it did when the 21st century began – despite the biggest wash of cheap credit the world has ever seen.
 
In other words, policymakers’ efforts to increase real demand have failed miserably. Go figure.
 
But our guess is the feds will not spend much time figuring out why their “stimulus” model doesn’t work. It’s the only tune they know. As it fails, they will merely keep singing, louder.
 
How?
 
Bypassing the banks, they will put their newly digitized money directly into the hands of the people whose votes they need to buy. This kind of flagrant money creation is becoming intellectually respectable, as a kind of final solution to the problem of insufficient demand.
 
Martin Wolf, the influential chief economics commentator at the Financial Times, has already suggested it publicly. Now, here comes an article in Foreign Affairs magazine titled: “Print Less and Transfer More: Why Central Banks Should Give Money directly to the People.”
 
Recognizing that QE and ZIRP are not making it to the top of the charts, the establishment is getting behind more direct inflationary measures. The article explains:
“It’s well past time, then, for US policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. […]
 
“Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. […]
 
“Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.”
Are you still holding government bonds, dear reader? Make sure you get rid of them before the music stops.
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Aug 28

Authentic Fed Gibberish

Gold Price Comments Off on Authentic Fed Gibberish
Or AFG…as opposed to the inauthentic kind…
 

SO I was not at my personal best that morning, I admit it, writes the Mogambo Guru at The Daily Reckoning, but neither was the rest of the family, and making Freudian slips, while still early-morning groggy, is easy to do.
 
As I was to learn, everyone is all upset that I accidentally called the kids “stupid Earthling carbon units” instead of referring to them as “my wonderful, darling children”, which I admit I reflexively did NOT do because they are neither wonderful nor darling, but are instead some kind of mutant Dollar-gobbling machines.
 
The issue was about, again, getting braces for one of the kid’s teeth, I don’t remember which one.
“Don’t you see? The Dollar is losing its buying power…because the horrid Fed… continues to print So Freaking Much (SFM)…”
Naturally, as the caring, loving father, I patiently tried to explain that the mutant neo-Keynesian econometric lunatic Janet Yellen was at the helm of the evil Federal Reserve doing the same monstrous “money-and-thus-debt-creating” monetary expansionism crap that causes inflation in the prices of things you need and deflation in the prices of things you don’t, and gold goes up in price because it is the ultimate money which everyone will be turning to as all the other fiat-monies fail, slowly, terrifyingly, one after another, in the economic mayhem when insane levels of lunatic leverage are unwound.
 
I actually remember cleverly summing up by saying, “And therefore, we should put all our cash into gold, silver and oil! We should NOT, on the other hand, be foolishly wasting resources by getting braces for somebody’s teeth!”
 
Let the teeth grow in naturally, all crookedy and snaggly, and thus we will reap a veritable cornucopia of benefits! She will not be popular, based on her repellent looks, so we as parents won’t have to worry that she will get pregnant! Or have her stupid friends stealing food from our refrigerator, saving us money! And she will, out of bored necessity, busy herself educating herself in rigorous academics, excelling in sports, or doing something that can snag a nice college scholarship.”
 
Not content at that, I regret that I went on, “Or at least get off her fat butt, go out and get a job and pay for the damned braces herself, if it is so damned important to her, because, in case you people ain’t heard, I Ain’t Made Of Money (IAMOM)!”
 
The way their eyes were wide and staring, and their mouths were hanging open in stunned stupefaction, replete with glistening drool dribbling down their stupid chins, was my first clue that I was not succeeding in presenting my Mogambo Ironclad Economic Reasoning For Survival (MIERFS).
 
So, to remedy the situation, I helpfully continued, “Don’t you see? The Dollar is losing its buying power at accelerating rates, on its way to zero buying power, because the horrid Fed (and the other central banks of the world) continues to print So Freaking Much (SFM) money and credit, so that the bloated, bankrupt government can borrow it and cram it into the bloated, bankrupt economy. That causes gold, silver and oil to go up mightily in price! It’s guaranteed! It’s guaranteed because history shows they always do!”
 
I was instantly hurt and irritated that they did not leap to their feet, applauding in joy at my brilliant idea. That’s when I said, “Don’t you see what I am talking about, you stupid Earthling carbon units? When gold, silver and oil soar in price, that – that! – would be the time to sell a little bit of these wonderful appreciating assets, and use the pile of cash to have those nasty teeth pulled out and replaced with the latest and greatest innovations in implanted replacement teeth of the future, miracles of modern dentistry – maybe with built-in internet connectivity! – giving her a brilliant smile that her own stupid teeth could never even hope to achieve!”
 
Instantly, I was beset by the anticipated tide of people leaping to their feet, alright, only with no applauding, but instead having cereal bowls and spoons flying willy-nilly, a lot of screaming of really hateful words, how I was a horrible, horrible man who hates his children, and how they all wished I was dead, loudly daring each other to kill me (“I dare you!”), and blah blah blah.
 
Alas, my brilliant and wonderful Mogambo Ironclad Economic Reasoning For Survival (MIERFS) idea was for naught. Grasping at straws, I offered a little “happily ever after” treacle, saying, “Thus, she will be an inspiring story of an Ugly Duckling becoming the Beautiful Swan, a hero to ugly girls around the world, and her handsome prince will come along, and she will live happily ever after. In a castle!”
 
Desperate to seal the deal, I offered another hidden benefit. “And she’ll never have a cavity, or root canal, or crown, or bridge, or any of that expensive dental stuff to deal with, or pay for, ever again, either!”
 
But I see that my words that got me in trouble, which, thankfully, none of them recorded on their phones, and so it is just their lying words against mine.
 
But at least I am not poor Stanley Fisher, the vice-chairman of the Federal Reserve, who IS on record as saying, according to the Financial Times, “The challenge for policy makers was separating the cyclical from the structural, the temporary from the permanent.”
 
What? Hahaha!
 
Apparently, the structural part of the economy can exist independently of the cyclical, cyclical things don’t need the structural things, while cyclical things cannot become structural, and structural things cannot become cyclical! Hahahaha! The monetary policy of the United States is in the hands of these kinds of people? Yikes!
 
And don’t get me started on the insanity of hypothesizing something “permanent” in the economy, as nothing is permanent anywhere I look, but instead always in a state of decline. And so I would certainly rudely blurt out, “Drop dead, ya lowlife moron!”, the words dripping with all the scorn and contempt I could dredge up.
 
The part that almost made me pee in my pants was when he said, “The difficulty in disentangling demand and supply factors makes the job of the monetary policy maker especially hard since it complicates the assessment of the amount of slack, or under-utilised (sic) productive capacity, in the economy.” Hahahahahahahahahha!
 
I laugh uproariously! This Authentic Fed Gibberish (AFG)!
 
“Disentangling demand and supply factors”! Again, Hahahahahahaha! A new interpretation of Say’s Law? Hahahaha! As Bugs Bunny would say, “What a maroon!”
 
It all seems so, so easy to me. So easy, in fact, that I gleefully exclaim, “Whee! This investing stuff is easy!”
 
Perhaps this ridiculous nonsense was merely a ruse to distract us from asking how “tapering” of Quantitative Easing led the evil Federal Reserve to increase Total Credit by a hefty $11.5 billion in One Freaking Week (OFW) last week, and bought up a goodly $8.7 billion in US government securities, too, some or all of which may explain why the Monetary Base jumped up a massive $84 billion in that selfsame One Freaking Week (OFW) last week!
 
You can tell by the suddenly-serious look on my terrified face and my cold, steely gaze that when the vice-chairman of the foul Federal Reserve is saying things like that, and the Fed itself is creating cash and credit like that, and the population, and the politicians, and all our vaunted intellectuals of the United States are accepting things like that, then we are surely, surely doomed.
 
And if THAT if is not enough to make even the dullest Earthling carbon unit unhesitatingly want to go all-in, buying gold, silver and oil with a terrified, frenzied abandon, forsaking all else, then all the braces and the straightest teeth in the world will not be enough to pay for that dreadful mistake.
 
It all seems so, so easy to me. So easy, in fact, that I gleefully exclaim, “Whee! This investing stuff is easy!”
 
But to Earthling carbon units, it is apparently very difficult, if not impossible, to even vaguely understand. Maybe it’s their bizarre fixation on the straightness of their teeth!
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Aug 06

Gold Resilient Amidst Troop Build-up on Ukrainian Border

Gold Price Comments Off on Gold Resilient Amidst Troop Build-up on Ukrainian Border

GOLD PRICES recovered Wednesday morning after yesterday’s drop, while the Euro hit a 9-month low against the US dollar.

European stock markets ticked slightly lower and decreased for the fifth time in six days.

Brent crude oil rose to $104 again, a level it already reached at the beginning of the week.

Gold consolidated and was range-bound around $1290 per ounce on Wednesday morning, whereas silver traded at $19.83. The gold price in Euro stood at midday on its highest point in five sessions, trading shy of €970 per ounce.

Silver prices dipped below $20 per ounce yesterday for the first time in seven weeks. Other precious metals such as platinum and palladium also traded lower by more than 1 percent.

Gold prices in Shanghai closed at $1293.12 today. This level was already reached yesterday, after gold ticked up as Asian shares fell after Chinese economic data release. “The fact silver fell less than gold [the day before] which was the opposite to what happened in London yesterday, suggests industrial demand for silver in China is helping to cushion the price fall here,” reckons Will Adams at the Bullion Desk. 

Earlier on Tuesday, Gold prices declined after the release of the ISM Non-Manufacturing data for July, explains a Japanese analyst. At 58.7, the index, which measures the business conditions in the US non-manufacturing sector, was much better than the forecast 56.5 and the highest result since January 2008. A result above 50 is considered bullish for the USD.

Gold later recovered as President Putin’s order to respond to US and European “unacceptable” sanctions by reinforcing troops at Ukraine’s border raised concerns about a possible Russian invasion. “There’s a lot of equipment. This is the sort of thing one does to exert pressure or to invade,” told Polish Foreign Minister Radoslaw Sikorski to TVN24 BiS television.

“Gold prices rose on Tuesday [afternoon] as a tumble in US equities and worries about escalation of military action in eastern Ukraine helped bullion recover earlier losses driven by bullish US economic data,” agrees Thomson Reuters.

“The situation in the Ukraine bears some watching this week, as we could be in for something of an ‘August surprise’ if policymakers misread Presidents Putin’s intentions,” comments Edward Meir at INTL FCStone.

The single currency versus the Dollar meantime hit 1.3347, a level that was last touched in November 2013. Apart from the risk-awareness due to the rising tensions between the Ukraine and Russia, “weak German economic data deepened concerns about the currency bloc’s economic recovery,” says the Financial Times. German factory orders unexpectedly dropped in June compared to the previous month.

In the meantime, Italy reportedly fell back into recession. According to latest figures, Italy’s GDP contracted by 0.2% in the second quarter of the year.

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Aug 03

War Coming in Europe

Gold Price Comments Off on War Coming in Europe
So says a Moscow insider dismissing the $50bn Yukos Oil fine…
 

ONE HUNDRED years ago a feisty little Bosnian Serb, Gavrilo Princip, shot and killed the Archduke of Austria, Franz Ferdinand, and his wife Sophie in the city of Sarajevo, writes Greg Canavan in The Daily Reckoning Australia.
 
It was the “shot that rang out across the world”. A month later, the world was at war.
 
While historians have subsequently shown that the war was a long time coming – the result of rising imperialism of the great powers and the faltering old Austro Hungarian and Ottoman Empires – no one saw it at the time.
 
Take this contemporary account from Austrian novelist and playwright, Stefan Zweig, recounted in his memoir, The World of Yesterday. In the days following the assassination, Zweig was holidaying in the Belgian seaside resort of Le Coq…
“The happy vacationists lay under their coloured tents on the beach or went in bathing, children were flying kites, and the young people were dancing in front of the cafes on the digue (a bank or dike). All nationalities were peaceably assembled together, and one heard a good deal of German in particular…The only disturbance came from the newsboy who, to stimulate business, shouted the threatening captions in the Parisian papers: L’Autriche provoque la Russie, L’Allemange prepare la mobilisation.
 
“We could see the faces of those who bought copies grow gloomy, but only for a few minutes. After all, we had been familiar with these diplomatic conflicts for years; they were always happily settled at the last minute, before things grew too serious. Why not this time as well? A half hour later, one saw the same people splashing about in the water, the kites soared aloft, the gulls fluttered about and the sun laughed warm and clear over the peaceful land.”
Within a few days, Belgian soldiers arrived on the beach, with machine guns and dogs pulling carts. Then Austria declared war on Serbia. The resort town become deserted. Zweig quickly booked a train back to Austria.
 
Early in the journey, the train stopped in the middle of an open field. It was dark, but Zweig saw freight trains – open cars covered with tarpaulins – heading in the opposite direction. They were full of German artillery heading for Belgium. The war was underway.
 
What’s the point of recounting this story? Well, there’s the regional conflict in Ukraine that’s heating up. But the main point is that no one knows what the future holds.
 
In early 1914, the (Western) world had experienced a long period of economic expansion and freedom. Zweig travelled freely around the world without needing a passport or ‘papers’. Capital and labour mobility were high. There was virtually no income tax (nor was there a welfare state), the Federal Reserve had only just come into existence, and government involvement in all areas of life was minimal.
 
But that all changed with the Great War. It led to the rise of larger governments, the welfare state, and the unions. It led to greater state control of financial markets and it led to systematic inflation.
 
The world changed massively in 1914, and no one at the time would have picked the direction it was heading. Even after the war started, the general consensus was that it would be over by Christmas. As it turned out, it endured nearly to Christmas 1918.
 
These days, people seem pretty certain that the Fed has things under control. That interest rates will stay low for many, many years, stocks won’t have a meaningful decline. They seem confident in China’s ability to manage an historic credit boom, and confident that Australia’s 25 year property bull market will keep on giving. That could well be true. No one knows.
 
But history tells you that things change…often dramatically. It tells you that bear markets follow bull markets…that cheap prices follow expensive prices. That you can’t see the catalyst doesn’t mean it won’t happen. And just because governments and central banks around the world are trying desperately to levitate markets, doesn’t mean they will succeed.
 
And who would’ve thought that 100 years after the peak of the British Empire, the Commonwealth Games would still be going, or more unbelievably, that people still care? Seriously, what a strange little tournament it is.
 
Getting back to the 1914/2014 parallels (which may be a little closer than you think), last week the Permanent Court of Arbitration in The Hague awarded former shareholders in Yukos Oil US$50 billion in damages for having their assets taken from them by the Russian state.
 
Will Russia pay? It’s unlikely. They’ll just see this as a Western attempt to apply further economic sanctions over the standoff in Ukraine. As the Financial Times reported:
“But if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the West could sour further.
 
“One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine. ‘There is a war coming in Europe,’ he said. ‘Do you really think this matters?’…”
Maybe that’s just a bluff. But economic sanctions are often a path to war. Russia is an energy powerhouse and can inflict great damage on Europe if it wants to.
 
The repercussions for investors are obvious. It all comes down to confidence. When confidence (the belief that, y’know, everything will be fine) evaporates, so does liquidity. And it can go very quickly.
 
In 1914, the two largest exchanges in the world – the London and New York Stock Exchanges – closed for the first time in their history on July 31 to stop capital flight. New York remained closed for four months, London five months. At the time, no one thought such an occurrence possible.
 
That’s the problem. People, even experts, lack imagination during important historical turning points. Following the global financial crisis, the Queen asked a bunch of experts how no one saw this crisis coming. The response was along the lines of, ‘It was a failure of imagination.’
 
Hubris and overconfidence often inhibit the imagination. And if you look around markets and investors today, well, hubris and overconfidence are leaking out all over the place.
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Jul 24

Gold Prices "Range Bound", Dip Below "Psychologically Important" $1300 as Consensus Forecasts Fresh Falls

Gold Price Comments Off on Gold Prices "Range Bound", Dip Below "Psychologically Important" $1300 as Consensus Forecasts Fresh Falls
GOLD PRICES dipped Thursday in Asian trade, holding below what one bank’s trading desk calls the “psychologically important” level of $1300 per ounce for the first time in a week.
 
New manufacturing data showed strong growth for July in both China and the Eurozone, where service-sector activity also expanded at its fastest pace since 2011 on the Markit consultancy’s PMI survey.
 
After the China Gold Association said Wednesday that first-half demand in the world’s No.1 consumer nation fell 19% by weight vs. H1 2013’s record surge, new data today said gold bullion imports to China through Hong Kong – net of exports – hit a 17-month low in June.
 
Dropping some 30% in the first six months of last year, Yuan gold prices rose 5.4% between Jan. and end-May 2014, adding a further 4.4% last month.
 
“Acceleration in the US economic recovery story remains the key driver behind our lower gold price forecast,” says a note dated Wednesday from US investment bank Goldman Sachs.
 
Repeating its call for gold to end the year at $1050 – below 2013’s three-year lows – “US economic releases have continued to [improve] while tensions in Ukraine have escalated, keeping gold prices range bound near $1300.”
 
New data Thursday said US claims for jobless benefits were the lowest last week since 2006.
 
“Investors going risk-on into equities pushed the gold price lower,” reckons the commodities team at Germany’s Commerzbank in Frankfurt. “Silver followed gold’s trail.”
 
“The rally in US equities continues to be a headwind for gold,” agrees Australia’s ANZ Bank, “despite safe haven buying providing some support to prices.”
 
Warning today of a “dire situation” in Gaza, the United Nations also reported that bandit army the Islamic State has ordered mass mutilation of women and girls in the Iraq city of Mosul, under its control since early June.
 
The Financial Times meantime reports that a pro-Russian separatist leader in eastern Ukraine “came close to an admission of guilt” for killing 298 civilians on Malaysian flight MH17 last week, saying his forces did control a missile launcher of the type believed to have downed the airliner.
 
“We are mildly bullish for gold this year,” Reuters quotes analyst David Jollie at Japanese trading house Mitsui, “but we feel many of the gains may already have been made.”
 
That contrasts with the newswire’s survey of 31 market analysts, which earlier this week showed consensus forecasts of a slight annual drop in 2014, with gold prices averaging $1255 in the last 3 months of the year against $1290 over the first half.
 
While US Fed tapering of its quantitative scheme “should [now] be fully priced in”, says Jollie, the end of that process will however spur “market uncertainty” with regards to when the central bank may raise rates.
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Jul 24

100 Years to the Day Since the Gold Standard Died

Gold Price Comments Off on 100 Years to the Day Since the Gold Standard Died
Gold Standard payments through London look awfully like US Dollar clearing a century later…
 

GOLD loves nothing if not irony, writes Adrian Ash at BullionVault.
 
And here, 100 years to the day after the approach of World War I killed the Gold Standard stone dead, the world’s monetary system risks breakdown again.
 
Again you could blame war in a poor corner of Europe. Again, that war could be cast as a big power demanding a small neighbor says “sorry” – then Serbia for the murder of a fat-necked Austrian prince, now Ukraine for ousting its fat-headed Moscow-backed president.
 
If irony suits, it only tastes richer when you think this week also marks 70 years since the Gold Standard’s replacement was put together as the war that followed the war to end all wars finally slaughtered itself to a close. But that shadow system…of invisible gold and all-too visible paper…didn’t quite die when the Dollar-Exchange system lost its link to bullion. US president Richard Nixon “closed the gold window” at the New York Fed in August 1971, yet the Dollar still rules today. So like world trade needed access to the City of London a century ago, clearing funds through a US bank is vital for world trade today.
 
Say US clearing becomes unavailable – or untrusted for credit-default or political reasons. Either trade will shut down (see the post-Lehmans’ crisis of 2008), or it will find other systems to use. Comic little pops like bitcoin might suggest that’s where apolitical free trade is headed, onto Silk Road and elsewhere.
 
Back to 1914, and “It may be,” one merchant banker noted before the July Crisis hit London, “that hides and rabbit skins are being sold from Australia to New York, or coffee from Brazil to Hamburg.” Either way, and whatever was being shipped to wherever, in every such cross-border deal “the buyers and sellers settle up their transaction in London.”
 
That remains true of wholesale gold and silver today. Lacking any mine production, and with no consumer demand or refinery output to speak of, the UK still hosts the world’s physical bullion market, settled in London’s specialist vaults and ready for “digging out” onto a forklift truck before being shipped to the new owner should they ever want it. From Arizona to Beijing, Perth to Qatar, the world trades market-warranted London Good Delivery bars. Those same standards apply in most local non-London markets as well. Great Britain still rules in gold, an echo of the high classical Gold Standard shot dead a century ago.
 
Europe’s second 30-year war destroyed Britain’s empire, but London’s role as the centre of money was already ruined. US banks moved into the rubble to settle the world’s business, and the US Dollar took over from Sterling as Washington hoarded central-bank gold to win the peace as well as the war at that Bretton Woods conference of July 1944.
 
What had stopped the world’s financial heart pumping in London? Scalded in late June 1914 by unknown Serb teenager Gavrilo Princip shooting dead the unlikable Archduke Franz Ferdinand, Austria handed its “belligerent ultimatum” to Belgrade on the evening of Thursday 23 July. Vienna’s 10 outrageous demands made rejection look certain. (Serbia agreed to four, only to find Vienna dismiss its reply and start shelling regardless). Financial markets finally panicked the next morning, at last. They had been slow to take fright, as Niall Ferguson notes of the bond market, distracted by more trouble in Ireland and the coming summer vacation. But now London’s bankers…creditors to half the world’s cross-border transactions, according to Jamie Martin in the London Review of Books…awoke to find their debtors unable to pay. Because “it suddenly became difficult for foreign borrowers to remit payments” anywhere, London would not extend fresh credit. So the world couldn’t raise the loans it needed to settle its debts, and the Sterling bill of exchange – “the world’s premier financial instrument” – went entirely offline.
 
Sterling bills had been crucial. These bits of paper turned the Classical Gold Standard into that “period of unprecedented economic growth, with relatively free trade in goods, labor and capital” which misty-eyed gold bugs might think came thanks, between about 1880 and the rude end of July 1914, to physical metal alone. Promissory and transferable notes, typically with a 3-month maturity as Martin explains in the LRB, Sterling bills were accepted by traders on one side of the world in payment for goods sent to the other, and then sold to a local bank for cash. Merchant bankers in London then accepted and sold the bills on again, with the original debtor perhaps buying and sending another Sterling bill – rather than shipping physical gold – to settle the deal. Around it all went again. Until Austria’s ultimatum to Serbia stopped it.
 
Yes, the Sterling standard limped on, and yes, so did something like the Classical Gold Standard after the guns of August finally fell silent in 1918. But private gold had underpinned the whole system before. You could convert cash into gold at your bank, giving them every reason to offer good rates of interest instead. A universal equivalent for all major world currencies, it was vital that the gold was mostly privately owned, rather than trapped in government or central-bank hands (although that was already changing, with fast-growing national hoards announcing the rise of the warfare- and welfare state in the decade before Princip shot the Archduke, much like the political earthquake of WWI had already struck Britain with the People’s Budget five years before). But shipping bullion bars or coin remained clumsy, slow, risky, and thus expensive. So it was paper bills which released the value of the 19th century’s torrent of gold, first Californian, then Australian and finally South African, to grease the first era of globalization.
 
By the eve of Austria’s ultimatum to Serbia, the bill on London offered to some “a better currency than gold itself,” as a Canadian banker put it, “more economical, more readily transmissible, more efficient.” The City of London, capital of the world, stood ready to buy and sell whatever was wanted.
 
Nevermind. As Professor Richard Roberts explains in his excellent new Saving the City (free sample here), come 27 July – the Monday after the Serbs got Vienna’s demands – London’s money market was effectively shut. On Tuesday, with major shares like copper-mining giant Rio Tinto dumping 25% in a week, the London Stock Exchange suspended trade for the first time since it opened in 1801. From Wednesday 29 July, commercial banks in Britain stopped paying gold to the long queues of savers pulling out their deposits. But the banking run simply moved to the Bank of England itself, as people lined up on Threadneedle Street to swap the paper £5 notes they’d been given for Sovereign gold coins instead, sucking out £6 million of bullion in three days.
 
To stall the outflow, the annual Summer Bank Holiday was extended to nearly a week, from Saturday 1 to Friday 7 August. Ahead of the banks reopening, politicians desperate to lock down more gold for the national hoard “vociferously denounced the [private] hoarding of gold in speeches in the House of Commons,” says Professor Roberts. But by then, Great Britain had already declared war on Germany on Tuesday the 4th. The Gold Standard would never recover, built as it was on free trade, Britain’s imperial Navy and those Sterling bills of exchange on London’s credit.
 
Yes, London’s role as gold clearing house continues today (for now). But total war needed endless state spending. So the free-trade basics – and bullion limits – of the global Gold Standard could no longer apply. Private gold shipments were replaced by government-to-government transfers inside the Bank of England, the Bank for International Settlements, and the New York Fed…before French warships hauled metal to Paris, and Russian Aeroflot jets swapped Kremlin gold for Canadian wheat. London’s Sterling bills have meantime long rotted as the world’s key means of exchange. Which brings us to the US Dollar here in 2014.
 
French bank BNP Paribas now faces a $9 billion penalty “and a one-year suspension in 2015 of direct US Dollar clearing on its and gas, energy and commodity finance businesses,” explains Pensions & Investments Online, after pleading guilty to $30 billion of transactions “with countries that are under US government sanction.”
 
That’s some slapdown. “Temporarily restricting its ability to handle transactions in Dollars,” says Bloomberg, “would present BNP with administrative costs and could test the willingness of clients to remain with the bank.”
 
Where else might those clients go? Forget the Yuan for the foreseeable future. The Dollar accounts for 41% of global payments by value, with the Euro at 32% and the British Pound in third place with 8%. The Chinese currency is way off the pace with just 1.5%. The Yuan accounts for only 23% of China’s own direct trade with the rest of Asia!
 
Financing crooks or clearing their deals is a bad thing, of course. But the list of countries wearing “US goverrnment sanction” only gets longer. Parking or trading your money only gets tougher if your home-state doesn’t suit what Washington thinks. Yes, a London government spokesman when asked Wednesday said there is a link – “a correlation” indeed – between the UK’s new sanctions against Moscow and outflows from London of Russian oligarchs’ cash. “That is certainly the case,” as money scared of being frozen or seized gets out while there’s still time. But London or Frankfurt today is nothing next to the United States’ place in clearing global finance.
 
“No international bank,” as the Financial Times noted last week, “can operate without access to the US money markets.” And with access now restricted, claims FTfm columnist John Dizard, thanks to “dangerously stupid punitive actions and fines levied on banks using the international Dollar clearing system [means] the world is finding ways to get along without the Dollar.”
 
Chief amongst them, according to Dizard’s shadowy “sources”, is gold – “the most expensive and least convenient of all monetary alternatives to the Dollar.” Is he kidding? Perhaps not.
 
“Gold is very heavy to carry and often has to be re-assayed by the person accepting it as payment,” Dizard goes on, “since there is often a lack of trust among participants in the off-the-books transactions that use it.” No London Good Delivery and its chain of integrity here, in short. But where the rules roll over the trade, as India’s surging gold smuggling proves, the trade will find a way if it must.
 
“Not many transactions or investments are actually invoiced in gold as such,” says Dizard. “Instead gold is used as the settlement medium rather than for the price quotation.”
 
So welcome to our neo-Classical Gold Standard. “Gold’s popularity as a medium of international exchange,” Dizard says, “has been soaring.” The US might yet adapt, and accept that everyone pays who uses the Dollar, rather than inviting the world to find a replacement instead. Legal drug dealers in the United States, after all, need somewhere to bank their profits too.
 
Happy 100th birthday meantime to the death of gold money.
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