Archive - Nov 4, 2011

Slowly, but surely, the global economic growth dynamo is growing ever dimmer and dimmer. Two days ago we reported that that relentless driver of global growth - exports - finally succumbed to reality, as slowly but surely the paradigm of everyone exporting to someone else with magically nobody importing, logically collapsed. This is now followed by German manufacturing, that traditional and only source of strength in Europe, which half an hour ago was reported to drop 4.3%, compared to an expectation of a 0.1% gain. In other words, as the chart below shows German factory orders have just suffered their worst three, post-Reunification months outside of the late crash itself, falling at a 28% annualized rate, to take the total back to where it first stood over five years ago. Reaction is swift: Italian and Spanish bonds immediately drop, with the yield returning to 6.23% and 5.52%, forcing the ECB's monetization actions to have to fight not only "speculators" but also reality.

Jefferies will have to dump its sovereign bond position. What might that mean?

Many market participants and non gold and silver experts tend to focus on the daily fluctuations and “noise” of the market and not see the “big picture” major change in the fundamental supply and demand situation in the bullion markets – particularly due to investment and central bank demand from China, India and the rest of an increasingly wealthy Asia. The central banks of India and China are rightly believed to be again quietly accumulating gold and the IMF figures do not include this potentially very important and significant source of demand. China’s gold reserves are very small when compared to those of the U.S. and indebted European nations. They are miniscule when compared with China’s massive foreign exchange reserves of over $3 trillion. The People’s Bank of China is almost certainly continuing to quietly accumulate gold bullion reserves. As was the case previously, they will not announce their gold bullion purchases to the market in order to ensure they accumulate sizeable reserves at more competitive prices. They also do not wish to create a run on the dollar – thereby devaluing their sizeable reserves. The deepening Eurozone debt crisis and real possibility means that central bank demand will remain robust and may even increase in the coming months.

Yesterday we reported that in the aftermath of MF Global, and concurrent with Greece nearly allowing democracy for one brief second, European banks had scrambled to put a record amount of cash with the Federal Reserve. Next we get confirmation from the ECB that like in the US, so in Europe, in the absence of any confidence in one another (ignore Liebor, which while up again is and has always been a collusive joke intended to convey bank strength), the only place banks have left to dump money is the ECB. As of this morning, a 16 month high of €275 billion in cash had been parked with Mario Draghi, an amount which is promptly removed from the Keynesian money multiplier myth, and which confirms that there is a behind the scenes liquidity panic unlike anything we have seen since Lehman, and in fact, as the second chart from Sean Corrigan showing ECB fixed and deposit usage as well as Fed reverse repo and overall foreign bank cash parking, the liquidity in the market now from a European point of view, contrary to what broken indicators may show, is the worst it has ever been with nearly $1.6 trillion in liquidity removed from broad circulation and parked with either just the Fed or the ECB. Translated: as goes democracy, so goes confidence.