While the extreme volatility associated with the 8amET hour in Gold and Silver trading is no surprise, the strength of the USD (helped by JPY weakness along with pretty much every other major) is slamming WTI crude, Gold, and Silver lower this morning. The Dollar Index move in the last two days is the largest in 16 months; Gold's 2-day drop is the biggest (ex-the crash) in 10 months. "If you consider what is happening in the currency markets and then factor in the demand for the physical delivery of gold there should be some additional note of caution in your evaluation of the markets. Smart money always moves first while dumb money lingers and is baited by those that take advantage of it. A sniff of Fear has returned to the marketplace and Greed may be in the process of giving way."
On Tuesday morning at 6 AM EST German Factory Order numbers were released that showed a plus 4 percent gain month over month. Yet last Friday, May 5th US Factory orders were released that showed a negative 4 percent growth rate month over month. Yesterday, German Industrial Production showed a gain of 1.2%.
When a sell-side strategist says 'buying opportunity of a lifetime', we know there will be another right around the corner even if we rally 10%; when one of the largest buy-side firms believes "this is an almost biblical opportunity to reap gains and sell," we tend to listen. In this brief clip from last week's Milken Institute, Apollo Group's Leon Black says his firm has been a net seller for the last 15 months, and that they "are selling everything that is not nailed down." Critically lost in the mainstream media's diatribe is his point that as the markets push higher, juiced by the Fed's policies, his firm will be selling more and more into that and harvesting gains (realizing profits) as opposed to watching unrealized gains (and the mirage of a wealth effect). Apollo has had $13bn of 'realizations' in the last 15 months - the most ever - as he sees "the market is pricey... in our view, priced for perfection." We suspect perfection is far from what we achieve.
After a disastrous few days in early April, bitcoin is back over $100 and up on the month, the year and its short lifetime. ConvergEx's Nick Colas is intrigued and continues to believe that this phenomenon is the most provocative economic experiment since the invention of the euro and well worth watching. The next chapter of the story, he believes, will be the entry of a host of "Smart money" venture capitalists looking to build the currency's infrastructure. Money and currency are exactly the kind of large, scalable and complex opportunity that gets VCs very, very excited. Yes, it could all still end in tears, either by regulation or mismanagement. But bitcoin isn’t dead just yet, and it remains one of the most potentially disruptive forces in modern finance. In summary, bitcoin is what he calls a "Beta currency." How it all shakes out, however, will be both instructive to watch and potentially profitable for those on the right side of this very novel trade.
There is blood running in the gold market this morning after vicious selling which began on Friday afternoon and continued in Asian trading and through into European trading. Gold has fallen another 4.4% today after a huge number of stop loss orders were triggered at $1,480/oz pushing gold lower. Reports suggest that a futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting and spooked the markets contributing to the decline. The order was believed to have been placed through Merrill Lynch's brokerage team. Gold futures with a value of over 400 tonnes were sold in hours and this is equal to 15% of annual gold mine production. The scale of the selling was massive and again underlines how one or two large banks or hedge funds can completely distort the market by aggressive, concentrated leveraged short positions. It may again be the case that bullion banks with large concentrated short positions are manipulating the price lower as has long been alleged by GATA. Those with concentrated short positions may also have been concerned about the significant decline in COMEX gold inventories. The plunge in New York Comex’s gold inventories since February is a reflection of increased demand for the physical metal and concerns about counter party risk with some hedge funds and institutions choosing to own gold in less risky allocated accounts.
Wondering which dominoes are next to fall in Europe? Here is a list based on a simple but powerful precept: follow the smart money. In this case, the smart money entered the at-risk banking sector of a particular nation to skim the fat premium offered by its higher interest rates--rates that reflected the higher risk. The smart money then exits the nations' banking sector before the inevitable solvency crisis triggers capital controls and depositor expropriations (the comically misleading "bail-in"). Why is any money left in at-risk periphery banks? "Things fail from the periphery to the core." With this in mind, we might arrange the dominoes in this order: Slovenia, Portugal, Malta, and then Spain.
Soros’ yen “avalanche” would appear to have begun with the yen having fallen by 9.5% against gold in 5 trading days since last Thursday leading to record nominal highs in the yen at over 0.1577 million yen per ounce this morning.
The higher gold prices have led to a curious anomaly in Japan where the public has again been selling gold in cash for gold schemes, often due to being under financial pressure, while some Japanese investors and savers have diversified into gold coins and bars both of which have seen an increase in demand in recent days.
Q. What is your view on gold?
Soros: That’s a complicated question. It has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else. Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.
Witches Brew: Part 4 - Reality Bites
- The Specter of Things to Come
The road to ruin is on plain display and the playbook is easily seen at this juncture. Let’s take a look at how that playbook will unfold. Contrary to popular outrage of the SOLUTION being IMPOSED it is the correct one once the insured depositors where PROTECTED. In this edition the elites suffered FIRST followed by the private sector depositors who foolishly believed false BALANCE sheets which were POLITICALLY CORRECT but PRACTICALLY incorrect fictions approved by fiduciarily (regulations and regulators allowed ONGOING insolvent operations rather than protect the public by ending and prohibiting them) challenged governments (work for the banks and crony capitalists not for the public at large).
Physical gold and silver demand remains robust in many markets internationally. Demand from the Middle East remains robust as seen in the near record imports of gold and silver into Turkey. Turkey’s gold imports climbed to an eight-month high in March as prices averaged the lowest since May, according to the Istanbul Gold Exchange. Silver imports rose 31% from a month earlier according to Bloomberg. Gold imports increased to 18.26 metric tons, the most since July. That’s up from 17.34 tons in February and compared with 2.91 tons a year earlier, data on the exchange’s website show. The country shipped in 120.8 tons last year. Turkey was the fourth-biggest gold consumer in 2012, according to the London-based World Gold Council. Bullion averaged $1,593.62 an ounce last month and is trading about 17% below the record nominal high of $1,921.15 set in September 2011.
The smart money is selling Hong Kong and Singapore property. This implies real estate prices may be topping out, with far-reaching consequences.
Yesterday we noted the fact that China's Shanghai Composite was now red for 2013 as inflationary fears once again raise the odd specter of a central bank suggesting less than orgasmic expansion of its free money. While the 'Pisani's of the world see the relative outperformance as some 'rotation' in the smart money, we humbly suggest he take a trip down memory lane and note how rapidly the so-called 'smart money' reverted to China's lead in the last few years as the lack of an inflation shock absorber led the PBoC to pull back and implicitly drag on the world's equity market-based linearly-extrapolated economic growth hopes. As a reminder, it's never different this time.
With the marked shift in "coolness" surrounding smartphones away from Apple and toward Samsung (one of the primary reasons why AAPL is trading at or near its 52 week low and at the price target set for it by Jeffrey Gundlach back when the Smart Money crowd was advising their soon to be broke viewers to sell AAPL puts day after day), many wonder if this is merely a drop in innovation by Apple under it new, less visionary and far more Wall Street-friendly CEO, or is it something else? A possible answer is that is may be something as trivial as marketing. As the WSJ reports, in 2012 Samsung for the first time outspent AAPL in advertising dollars, handing out $401 million to raise brand awareness compared to Apple's $333 million.
For several long months now, the market has been treated to an unadulterated diet of such gross monetary irresponsibility, both concrete and conceptual, from what seems like the four corners of the globe and it has reacted accordingly by putting Other People's Money where the relevant central banker's mouth is. Sadly, it seems we are not only past the point where what was formerly viewed as a slightly risqué "unorthodoxy" has become almost trite in its application, but that like the nerdy kid who happens to have done something cool for once in his life, your average central banker has begun to revel in what he supposes to be his new-found daring – a behaviour in whose prosecution he is largely free from any vestige outside control or accountability. Indeed, this attitude has become so widespread that he and his speck-eyed peers now appear to be engaged in some kind of juvenile, mine's-bigger-than-yours contest to push the boundaries of what both historical record and theoretical understanding tell us to be advisable.
While the topic of net Fed capital flows, and implicit balance sheet risk has recently gotten substantial prominence some three years after Zero Hedge first started discussing it, one open question is what happens when we cross the "D-Rate" boundary, or as we defined it, the point at which the Fed's Net Interest Margin becomes negative i.e., when the outflows due to interest payable to reserve banks (from IOER) surpasses the cash inflows from the Fed's low-yielding asset portfolio, and when the remittances to the Treasury cease (or technically become negative). To get the full answer of what happens then, we once again refer readers to the paper released yesterday by Morgan Stanley's Greenlaw and Deutsche Bank's Hooper, which discusses not only the parabolic chart that US debt yield will certainly follow over the next several decades, but the trickier concept known as the Fed's technical insolvency, or that moment when the Fed's tiny capital buffer goes negative. In short what would happen is that the Fed will be then forced to print money just so it can continue to print money.