Precious Metals

Confused why every asset class is up again today (yes, even gold), despite the pundit interpretation by the media of the FOMC statement that the Fed has halted more easing? Simple - as we said yesterday, there is $3.6 trillion more in QE coming. But while we are too humble to take credit for moving something as idiotic as the market, the fact that just today, none other than Goldman Sachs' Jan Hatzius came out, roughly at the same time as its call to buy Russell 2000, and said that the Fed would announce THE NEW QE^TM, as soon as next month, and as late as June. Furthermore, as Goldman has previously explained, sterilization of QE makes absolutely no difference on risk asset behavior, and it is a certainty that the $500-$750 billion in new money (well on its way to fulfilling our expectation of a total $3.6 trillion in more easing to come), in the form of UST and MBS purchases, will blow out all assets across all classes, while impaling the dollar. Which in turn explains all of today's action - dollar down, everything else (including bonds, which Goldman said yesterday to sell which we correctly, at least for now, said was the bottom in rates) up. Finally, as we said, yesterday, "In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals." Because when the market finally understands what is happening, despite all the relentless smoke and mirrors whose only goal is to avoid a surge in crude like a few weeks ago ahead of the presidential election, gold will be far, far higher. Yet for some truly high humor, here is the justification for why the Fed will need to do more QE, even though Goldman itself has been expounding on the improving economy: "The improvement might not last." In other words, unless the "economic improvement" is guaranteed in perpetuity, the Fed will always ease. Thank you central planning - because of you we no longer have to worry about either mean reversion or a business cycle.

Today, the metals space is abuzz with a CFTC "comment letter" posted on its website by an alleged "current JPM employee." There is only one problem - this letter is either a complete fraud or simply a total mockery, as it provides absolutely nothing new, and merely regurgitates existing manipulation claims already out in the public domain, and backed by precisely zero evidence. How about attaching a signed trade confirm, or a daily internal P&L report, or even a blotter entry? No? Because they don't exist? Needless to say, anyone can submit such an alleged insider letter, and since there is no name associated to it, we would advise everyone to merely enjoy this a prank attempt. Unfortunately, what more such repeated faux "whistleblower letters", which are likely forthcoming, from other "current JPM employees" will do is simply dilute the effect of any real such disclosure that may come in the future. For that purpose, we strongly caution anyone who considers submitting such disinformation attempts from doing so as it will merely impair and discourage any just intent of validated and justified whistleblowing, either at JPM or elsewhere.

As we have repeatedly said in the past, the quarterly Flow of Funds (or Z.1) statement is most interesting not for the already public household net worth and leverage data which serves to make pretty charts and largely irrelevant articles, but due to its insight into the stock and flow of both the traditional financial system but far more importantly - into shadow banking. And this is where things get hairy. Because while equities may have returned to 2008 valuations, the credit shortfall across combined US liabilities - traditional and shadow - still has a $3.6 trillion hole to plug to get to the level from March 2008 (see first chart). It is this hole that is giving equities, which have already surpassed 2008 levels, nightmares. Because while the Fed is pumping traditional commercial banks balance sheets via reserve expansion (read: fungible money that manifests itself most directly in $5 gas at the pump) resulting in a $2.3 trillion rise in traditional liabilities from Q3 2008 through Q4 2011, what it is not accounting for is the now 15 consecutive quarters of shadow banking system contraction, which peaked at $21 trillion in Q1 2008, and in Q4 2011 declined to $15.1 trillion... and dropping. It is this differential that will be the source of the needed "Outside" money, discussed yesterday, and that is only to get equity valuations to a fair level! But considering the Fed's propensity to print at any downtick, this is very much a given, much to the horror of Dick Fisher. Any additional increase in stock prices will require not only the already priced in $3.6 trillion, but far more direct Outside money injections.

UPDATE: The UK outlook change has had little reaction so far: TSY yield down 1-2bps, gold/silver bounced up a little, and a small drop in GBP.

While most of the talk will be about the drop in precious metals today, the sell-off in Treasuries is of a much larger relative magnitude and yet equities broadly ignored this re-risking 'signal'. At almost 2.5 standard deviations, today's 10Y rate jump (closing it above the 200DMA for the first time in eight months) trumps the 1.3 standard deviation drop in Gold prices - taking prices back to mid-January levels. According to our data (h/t JL) for only the 14th time in the last five years (and not seen for 16 months) Treasury yields rose significantly and stocks fell as the broad gains in yesterday's financials (on the JPM rip) were held on to at the ETF level but not for Morgan Stanley, Goldman Sachs, or Citigroup (who gave all the knee-jerk reaction back). Tech led the way as AAPL surged once again (though faltered a few times intraday) having now completed back-to-back unfilled gap-up-openings. Credit and equity were generally in sync until mid afternoon when the up-in-quality rotation took over and stocks and high-yield sold off (notably HYG - the high-yield bond ETF underperformed all day long) while investment grade credit rallied to multi-month tights. VIX bounced higher (notably more than the S&P would have implied) recovering to Monday's closing levels and back above 15%. The Treasury sell-off was 'balanced' in terms of risk-on/-off by the strength in the USD (and modest weakness in FX carry pairs as JPY's weakness was largely in sync with the rest of the majors - hinting its was a USD story). Oil and Copper both lost ground (as did Silver - the most on the day) though they tracked more in line with USD strength than the PMs.

Only in a debt-based money system could debt be curiously cast as an asset. We’ve made “extend and pretend” a quaint phrase for a burgeoning market for financial lying and profiteering aimed toward preventing the collapse of a debt- (or lack-) based system that was already doomed by its initial design to collapse. This primer will detail the major components and basic evolution of fake wealth creation, accelerating debt expansion, hollowing out of the economy, and inevitable financial implosion.

...most investors fall into one of two categories: those that hold an abundance of gold and silver (which tends to be physical forms only), and those with little or none. While both groups need to diversify, I'm a little more concerned about the second group. Here's why. Regardless of what you think will happen over the remainder of this decade, one thing seems virtually certain: the value of paper money will be affected, perhaps dramatically. Even if the economy slips into deflation, the deflation wouldn't last long. A panicked Fed would print to the max and set off a wild rise in prices. This is why we're convinced currency dilution will not only continue but accelerate. Let's take a look at what's happened so far with the value of our currency vs. gold, after accounting for the loss in purchasing power.

Robert Mish has been a precious metals dealer for nearly 50 years and knows what a gold bubble mania looks like. We are nowhere near that stage, in his opinion. Instead, he sees a US populace largely unappreciative of holding precious metal as a store of wealth, and engaged in a slow process of dis-hording their gold and silver to eager foreign buyers who are more than happy to take the bullion back to their shores. In terms of where we are on the gold mania spectrum, he sees us at a "2" out of 10. But he foresees a very rude awakening ahead as the populace eventually wakes up to the increasing damage our over-debted global economy is doing to the purchasing power of world currencies. Because when the general investor finally realizes the protection the precious metals offer against currency debasement, much of the retail supply will already be out of the system in very tight hands, and largely overseas. Moreover, when supply gets tight, there will be more challenges to obtaining physical bullion during a buying mania than there were during the last one in 1980. There are many fewer local sources to exchange bullion these days as much of that business is now transacted by online vendors dependent mail delivery to ship product, which are more vulnerable to supply chain disruptions. And be sure you're aware of how the form you hold your bullion in will affect the price you get during a buying frenzy, when refining capacity is overwhelmed. You may find you gold or silver sells at a hefty discount because it's not in a preferred format for trade.

Once again European credit and equity markets flip-flopped intraday from a gap up open (yay, the PSI deal is done) to a modest financial-led selloff on weak data, to a non-financial-led small rally (with equity beating credit post US NFP) to a slide weaker into the European close. Financials (most notably senior unsecured) were the worst performers on the day as stocks managed small gains and credit bigger losses. European sovereign spreads also leaked wider all day after some initial excitement with Italian 10Y spreads 15-20bps off their best levels of the week into the close (and Portugal also leaking wider). US Treasuries continued to selloff as US equities limped higher but EURUSD is pushing back to the week's lows near 1.31 as JPY is also deteriorating (which is modestly stable for carry FX and implicitly risk). Commodities surged (seemingly on Goldman's GDP cut implying great er hopes of QE?) with Gold up over $1710 and almost unch for the week as WTI nears $108 again. As Europe closes, there is a modest derisking across all asset classes (with US and European financials the most obvious rollers). The Precious metals rip and Treasury weakness makes us wonder how much is QE-driven (especially given the sterilized propositions) and how much is simply a rotation to a different kind of safety or quality collateral? The LTRO Stigma is around 8bps (or 10%) higher on the week while Senior-Sub spreads are stable for now.

Update: yup. It's Jon "Mouthpiece" Hilsenrath all right. This is nothing but a test to gauge if the market will ramp on the clarification that future QE may be sterilized. If market ramps regardless, the sterilized clause will be ultimately eliminated. Full story link.

While we have yet to see the actual report, almost certainly emanating from Jon Hilsenrath, it appears that the QE3 rumormill has started, initially with speculation that the Fed's activity will be merely "sterilized" or more Twist-type purchases, unclear however if in TSYs or also in MBS. Via the WSJ:

• Fed Officials consider "sterilized" option for Future bond buying
• Operation Twist Reprise, QE Other Options For Fed Bond
• Still Unclear Whether Fed Will Launch Another Bond-Buy

As a reminder, yesterday we said that according to the EURUSD, the implied market expectation is for a $750 billion QE out of the Fed. However, that is for unsterilized balance sheet expansion. If the Fed goes ahead and does not grow its balance sheet (hence "sterilized"), it may well be EURUSD, and thus risk, and gold, negative, as no new money will enter the market for actual speculation. Which perhaps is precisely what the Fed is planning, as every incremental dollar now goes into Crude first, and everything else later. In other words: this is a very big risk off indicator as no new money will be available to pump up stocks!

All you need to read.

Swiss money manager and long term bear Marc Faber, aka "Dr Doom", says political risk in the Middle East has increased significantly with war between Iran and Israel “almost inevitable”, and precious metals and equities investments offer some safety. "Political risk was high six months ago and is higher now. I think sooner or later, the U.S. or Israel will strike Iran - it's almost inevitable," Faber, who publishes the widely read Gloom Boom and Doom Report, told Reuters on the sidelines of an investment conference. Brent crude traded near $123 per barrel in volatile trade on Tuesday on fears of a disruption in Iranian supplies. Israeli Prime Minister Benjamin Netanyahu showed no signs of backing away from possible military action against Iran following a Monday meeting with U.S. President Barack Obama. "Say war breaks out in the Middle East or anywhere else, (U.S. Federal Reserve chairman) Mr Bernanke will just print even more money -- they have no option...they haven't got the money to finance a war," said Faber. "You have to be in precious metals and equities ... most wars and most social unrest haven't destroyed corporations - they usually survive," he said. He said that Middle East markets had largely bottomed out, though regime changes from the Arab Spring revolutions were unlikely to be investor-friendly.

The positive PMI data would ordinarily result in some price weakness as would the testimony from Bernanke which suggested that the Federal Reserve's ultra loose monetary policies may not continue much longer. However, the scale of the selling and size of the price falls was unusual. Respected analysts such as legendary Jim Sinclair, John Embry and Jean-Marie Eveillard suggested that the sell off was due to manipulation by bullion banks. Sinclair said it was an “intervention” and was “window dressing” that long term bullion investors should not be concerned about as inflation was coming due to “QE to Infinity.” Embry said that it was a “smash down” and a “paper fiasco.” Jean-Marie Eveillard suggested that central banks may have intervened, as they are doing in fx and bond markets, and sold gold in volume into the market. It is of course very difficult to ascertain what caused the sharp falls in the precious metals yesterday however it would be naive to completely discount what Sinclair, Embry and Eveillard believe may have happened.

Risk off. On one of the highest volume days in months (for equity cash and futures), ES (the S&P e-mini futures contract) fell over 20pts from high to low following Bernanke's lack of expansionary comment. Right at the close we accelerated very fast losing around 6pts almost instantly as the market had a very jittery feel. The major financials were off 2.5-3% from the 10amET Bernanke speech release (and XLF was down 1.4% from that peak) but it was the precious metals that shocked. Gold had it largest percentage drop (over 5%) since early December 2008 (around $100) and Silver plunged over 7% at its worst, managing to come back a little to close down around 6%. Oil did not follow the Central-Plan (to talk down the print-fest) as WTI pushed back up to $107 and Brent over $123 as the USD rallied aggressively - now up over 0.5% on the week. Treasuries early dislike for the removal of the punchbowl was quickly dismissed as equities sold off this afternoon and we drifted back 1-2bps from high yields of the day (though still higher yields close to close). As we noted two days ago on Twitter, the market seems only capable of reacting to addition or removal of central bank liquidity and what was perhaps odd today was the delayed reaction - one of incredulity maybe at the gall of these printers to stop/pause.

Dumping yet another liquidity cold shower in the aftermath of today's less than dovish Humphrey Hawkins speech by Bernanke (and sending precious metals even lower, albeit briefly), is the Fed's resumption of even more purely optical liquidity extractions, however symbolic, in the form of reverse repos, after the NY Fed just completed the first such operation since the dark days of summer 2011. As a reminder, the last time the Fed did these was back in August 2011 which cemented the market's plunge as it gave the market the impression that at least superficially no more money was coming in (intuitively it makes no sense to have Reverse Repos running at the same time as incremental liquidity), even as the reliquification baton was quietly being passed to the ECB. Today, reverse repos resume, as the Fed pays Primary Dealers an annualized rate of 0.17% in exchange for lending out $100 million in Treasurys. Will this continue? It depends entirely on what the economy, pardon, the Russell 2000 does. After all, that is the third and only mandate of the Fed that matter. And if the market considers this an indicator that QE3 really is delayed indefinitely, the FRBNY will mostly likely be forced to reassess.