Gold Bugs

Guest Post: Roubini Attacks The Gold Bugs

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.

"The Market Would Have Collapsed" Had The PBOC Drained: Chinese Liquidity Shortage Hits All Time High

Those who have been following our coverage of the bipolar Chinese liquidity situation (most recently here and here) are well aware of the unique position the world's fastest (if only on paper) growing economy finds itself in: on one hand, it is the target of massive external hot money flows from both the Fed and the BOJ, which are pushing select inflation in the country higher, manifesting itself best in the real-estate market now higher for 12 consecutive months. On the other hand, the local banking system is in such dire need of liquidity, that not only have various short-term SHIBORs soared to multi-year highs but as Market News reported last week, China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in the market overnight and almost ushering in the first bank failure in China. The unprecedented liquidity shortage in China is seen best on the overnight SHIBOR chart below which just hit an all time high. In a nutshell there is zero free liquidity in the system. So what would have happened if the PBOC had continued on its merry way of withdrawing liquidity from the interbank market? Very bad things. “If the PBOC sold repos or bills today, the market would have collapsed.”

Desperately Seeking $11.2 Trillion In Collateral, Or How "Modern Money" Really Works

Over a year ago, we first explained what one of the key terminal problems affecting the modern financial system is: namely the increasing scarcity and disappearance of money-good assets ("safe" or otherwise) which due to the way "modern" finance is structured, where a set universe of assets forms what is known as "high-quality collateral" backstopping trillions of rehypothecated shadow liabilities all of which have negligible margin requirements (and thus provide virtually unlimited leverage) until times turn rough and there is a scramble for collateral, has become perhaps the most critical, and missing, lynchpin of financial stability. Not surprisingly, recent attempts to replenish assets (read collateral) backing shadow money, most recently via attempted Basel III regulations, failed miserably as it became clear it would be impossible to procure the just $1-$2.5 trillion in collateral needed according to regulatory requirements. The reason why this is a big problem is that as the Matt Zames-headed Treasury Borrowing Advisory Committee (TBAC) showed today as part of the appendix to the quarterly refunding presentation, total demand for "High Qualty Collateral" (HQC) would and could be as high as $11.2 trillion under stressed market conditions.

Guest Post: Unintended Consequences Are Increasing World Demand For Gold

With the financial experts claiming, some gleefully, that gold has "lost its safe haven status" in the aftermath of its biggest tumble in 30 years, many commentators thought (hoped?) that the dramatic price drop would steer people away from gold ownership. To my eyes, the past week has all the earmarks of a high-gloss propaganda campaign complete with well-placed anti-gold stories in the media and the careful use of language aimed at sowing doubt about gold's ability to be a store of wealth. But for those who consider gold a store of value, the recent gold slam is a gift: an invitation to purchase more sound money with fewer units of paper currency. In other words, a sweet deal.  Gold and silver on sale and the world is taking advantage.

CLSA Breaks The Wall Street Mold: Sells Japanese Equities To Buy Gold

In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.

Frontrunning: April 17

  • Boston bomb probe looking at pressure cooker, backpacks (Reuters), Boston Bomb Clues Surface (WSJ) Forensic Investigators Discover Clues to Boston Bombing (BBG)
  • China local authority debt ‘out of control’ (FT)
  • Gold Wipes $560 Billion From Central Banks as Equities Rally (BBG)... or the same impact a 2% rise in rates would have on the Fed's balance sheet
  • More Wall Street leakage: Stock Surge Linked to Lobbyist (WSJ)
  • China's bird flu death toll rises to 16, government warns of spread (Reuters)
  • Chinese official endorses monetary easing (FT)
  • As global price slumps, "Abenomics" risks drive Japan gold bugs (Reuters)
  • North Korea rejects US call for talks (FT)
  • IMF Renews Push Against Austerity (WSJ)
  • India Gains as Gold Plunge Boosts Scope for Rate Cuts (BBG)
  • Germany set to approve Cyprus aid (FT)
  • Easing Is an Issue as G-20 Meets (WSJ)

Guest Post: Gold Crash: What It's Not Telling Us

The recent plunge in gold prices below $1500 an ounce has suddenly awoken, well, just about everyone.  The "gold bugs" are yelling that it is a conspiracy theory by the Fed while the stock market bulls say it is a sign that the Fed has achieved its goal of creating economic growth.  Unfortunately, both arguments, while great for headlines, are wrong. The real concern for investors should not be the fall of gold - but the overall stock market.  With investors fully allocated to the markets - the lurking correction therein is potentially far more dangerous to portfolios than the current fall in gold simply due to weighting differences. Even with earnings hurdles moved substantially lower in recent weeks it may not be enough to offset the softening global economy. Perhaps, just perhaps, this is what gold, commodities and interest rates are really telling us.

Santelli On The End Of Paper Gold's Reign

Central Banks remain aggressive accumulators of the precious metal as we noted last night, as their actions outweigh their words; but as CNBC's Rick Santelli notes today, there is a big difference between the physical bullion they are buying and the 'gold bug' trading currently going on in our markets:

I don't even look at gold as gold anymore since they securitized it. If things [went] badly in the world that I used to observe (as a gold bug); the gold would end up in the hands of the gold bugs. If things go badly now, they're going to end up with checks from ETFs! Sorry, it's not the same. The reign of [paper] gold as the Ayn Rand endgame, to me, that's over. Game, Set, Match.

Which likely explains the incessant demand for precious metals from the US Mint over the past few months - as the other great rotation (from paper to physical) proceeds.

Guest Post: Gold Manipulation, Part 3: "The Systemic Risk Of Gold Manipulation"

This is the third and last of three articles we are posting on the price suppression of gold. In the first article we showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome.  Mainstream economics, framed by the Walras’ Law, believes in global monetary coordination which, to be achieved, necessitates that gold, if considered money, be oversupplied. The second article showed, at a very high (not exhaustive) level, how that suppression takes place and how to hedge it (if my thesis is correct, of course). Today’s article will examine the systemic impact of this suppression and test the claim of the gold bugs, namely that physical gold will trade at a premium over fiat/paper gold, commensurate with the credit multiplier created by the bullion banks. (Hint - it is)

Guest Post: Capital Controls, $5,000/oz Gold And Self-Directed Retirement Accounts

Recent news about Federal plans to "help" manage private retirement accounts renewed our interest in the topic of capital controls. One example of capital control is to limit the amount of money that can be transferred out of the country; another is limiting the amount of cash that can be withdrawn from accounts; a third is the government mandates private capital must be invested in government bonds. Though presented as "helping" households, the real purpose of the power grab would be to enable the Federal government to borrow the nation's retirement accounts at near-zero rates of return. As things fall apart, Central States pursue all sorts of politically expedient measures to protect the State's power and the wealth of the political and financial Elites. Precedent won't matter; survival of the State and its Elites will trump every other consideration.  All this raises an interesting question: what would America look like at $5000 an ounce gold?

Guest Post: Gold Manipulation, Part 2: How They Do It (And How To Hedge It)

This is the second of three articles on the suppression of gold. In the first article we showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome. This second article will show how that suppression takes place, and potentially how to protect ourselves from that manipulation.

Guest Post: Gold Manipulation: The Logical Outcome Of Mainstream Economics Part 1

This is the first of three articles on the suppression of gold. What drives us to write about the topic? We are tired of seeing endless proof of suppression (i.e. the typical take downs in the price at either 8:20am ET or at 10am-11am ET, with impressive predictability) and at the same time, it is unfair that anyone who voices this suppression be called a conspiracy theorist. The first letter will show that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome. To enforce a balance in the global fiat money market via coordination of central banks is impossible; what may be feasible is to coordinate the expansion in the supply of global fiat money. But if that is the case, the manipulation of the gold market to leave it oversupplied is the logical outcome. To pretend it is not... is a conspiracy theory!