Gold, and particularly silver, lease rates (see chart) have been rising recently. The rate is found by subtracting the silver forward offered rate from the London Interbank Offered Rate (LIBOR). This likely signals increasing tightness and illiquidity in the bullion markets (as recently said by Sprott Asset Management, and UBS yesterday). The rise in silver has been very sharp, having gone from 4.29 basis points (0.0429%) to 77.65 basis points (0.7765%) since the start of the year (31 December 2010). While the rise is very sharp, it is important to put it in context, and silver lease rates remain well below the levels reached after the Lehman Brothers systemic crisis in late 2008 when silver lease rates surged to 2.5%. At the same time, the very small silver bullion market is clearly under strain as seen in the continuing backwardation. This clearly shows that demand for physical is robust, evident from retail demand in the US where there were record US Mint silver eagle sales last month. There are delays (3 to 4 weeks) to get branded LBMA silver bars (100 oz) in volume.
Why Contrary To The Chairman's Lies, A Record Steep Yield Curve May Be The Most Bearish Indicator AvailableSubmitted by Tyler Durden on 02/09/2011 16:38 -0400
The most important characteristic of current capital markets, aside of course from now completely irrelevant stocks, which there is no point in even discussing any more as the Russell 2000 has become nothing more than a policy tool for Bernanke in pitching idiot Congressmen how "successful" his failed monetary policy has been when all it indicates is how good he is at manipulating stock prices, is the record steepness of the yield curve, as we have been pointing out month after month (oddly the topic never gets boring as it hits a new record wide with each passing month). And while to Ben the steepness is simply more good news to regale his questioners, who have no idea what the difference between a bond price and yield is, with, it is just as easily the most bearish indicator available. Nick Colas explains why "the bears also have more fodder from the steep yield curve than an Alaskan salmon run: the long end of the curve could be blowing out over inflation fears, persistent government debt issuance, or even a future downgrade of U.S. sovereign debt." But don't worry- the Chaircreature will never acknowledge that there is a yang to every ying. Especially not when the ying has to be so well priced, that Bernanke's midichlorian count has to be off the charts to get his liquidity extraction timing perfectly and avoid either a hyperdeflationary or hyperinflationary collapse.
With the physical gold market remaining very small when compared to the futures and paper gold market (futures, CFDs etc) there are increasing concerns of illiquidity due to the scale of demand and lack of supply. Pertinently, the size of the physical gold and silver bullion markets is tiny compared to the size of international equity, bond and currency markets. Not to mention the hard to fathom humongous international derivatives market (see chart below). The gold market remains one of the most liquid markets in the world. The market is more liquid than many government bond markets in Europe, with daily trading volumes normally exceeding $100 billion. UBS wrote about “illiquid conditions” in the gold market this morning. They did not clarify but they may have meant illiquidity in the physical gold bullion market.
Bruegel Think Tank Says Greece Should Restructure Debt Now, Claims Country Is Insolvent And Further Lending Is Not Viable StrategySubmitted by Tyler Durden on 02/08/2011 10:36 -0400
It has been a while since we were reminded just how bankrupt Europe continues to be. And while the market has put European solvency issues on the backburner now that some CDO is about to purchase 5 times its weight in toxic sovereign debt (which somehow means everything can be swept under the rug for at least 2-3 months), a Belgian think tank reminds us again that the "Greece Question" is still as open and festering as always, no matter how many lies G-Pap throws at anyone gullible enough to still listen to him. Greek paper Kathimerini cites Belgian think tank Bruegel which "has recommended that Greece should restructure its public debt as soon as possible, and that this should be one of the main elements of a comprehensive response to the eurozone crisis to be agreed by European Union leaders when they meet next month. In a policy brief published on Monday, the Bruegel think tank argues that Greece is “clearly on the verge of insolvency” and that the swift restructuring of its debt, with creditors accepting a 30 percent “haircut,” should form part of a three-pronged strategy that includes the strengthening of the eurozone banking system and policies to foster greater growth in member states with weak economies. “Our conclusion therefore, is that Greece has become insolvent and that further lending without a significant enough debt reduction is not a viable strategy,” the think tank argues." Of course, should Greek proceed with the inevitable impairments, the domino effect will promptly take out marginal banks across the continent leading to precisely the toxic spiral which Ben Bernanke and his European colleagues have been trying hard to avoid.
Morning Gold Fixing: Gold Bullion Considered As Collateral By International Clearing House – LCH.ClearnetSubmitted by Tyler Durden on 02/08/2011 09:38 -0400
A further sign of how gold bullion is increasingly seen as not only a safe haven asset and a currency but also a financial asset, is news that the LCH.Clearnet is giving further consideration to a plan to accept gold bullion as collateral. They may accept gold bullion as collateral against margin positions on a range of asset classes and derivatives in the international financial markets. LCH.Clearnet have been considering allowing gold as collateral since October 2009 and the move by the CME and JP Morgan to allow physical gold as collateral may have made their plans in this regard more concrete. "We’re looking at it closely,” David Farrar, LCH.Clearnet Director of Commodities told CNBC (see News). “It’s something that, subject to regulatory approval, we’d look to introduce later this year."... Keynes’s ‘barbaric relic’ is becoming less barbaric by the day. However, the man in the street remains completely unaware of this trend as it continues to be ignored by mainstream media and its implications not realised.
Morning Gold Fixing: JP Morgan Accepts Gold Bullion As Collateral – Silver Backwardation To Lead To Short Squeeze?Submitted by Tyler Durden on 02/07/2011 08:34 -0400
JP Morgan announced today that from now on they will accept physical gold bullion as collateral. This is a sign of gold’s further remonetisation in the global financial and monetary system. It may signal that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. They will not accept ETF trust gold as collateral. In October, the clearing house of global exchange CME Group – CME Clearing – announced it will now accept gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, gold, grains, equity indexes and Treasury bonds. Given the current monetary, macroeconomic and geopolitical risk gold is an attractive alternative to debt, equities or other paper assets as collateral. JP Morgans’s move shows how gold bullion’s fungiblity and tangibility as an asset makes it attractive and shows gold’s increasing importance in the financial system. Interestingly, the CME is storing their collateral gold at JP Morgan Chase Bank in London. The exchange said it hoped to add additional depositories in the future but there has been no announcement of developments in this regard.
Can markets alone save the pension promise? Of course not, but that doesn't mean we should abolish defined-benefit plans...
There are two reasons why I think the Fed will be loathe to remove QE. The first is the huge benefit (from the government’s perspective) of creating an inflation problem for China which will eventually force the Chinese to strengthen the Yuan. Congress has been pressing for harsher measures to force the Chinese to strengthen the Yuan (link here) for years and QE2 is turning out to be exactly the kind of pressure that just might work. I’ve long argued that this is a case of be careful what you wish for because the second the Chinese allow the Yuan to strengthen materially, the prices for everything that we buy from China (which is basically every single item on Walmart’s shelves) will rise an attendant amount. The other reason why QE is going to be with us for a long time is the ongoing need to support the massive size of monthly Treasury issuance. With the US expected to run a $1tr - $1.5tr deficit this year and another $2.5tr in maturing bonds to roll, there is very little chance that the US could continue to issue bonds at the current low rates without huge support from Mr. Bernanke’s POMO operations. Our total new borrowing and refunding needs will be greater than $300bn per month which is simply astronomical. Even bond investing legend Bill Gross is calling the US Treasury a ponzi scheme. If Bill Gross isn’t buying Treasuries who is?
Geithner Gone Wild: Treasury Entertains 100 Year and GDP-Linked Bonds to Fill New $2.4 Trillion "Demand"Submitted by EB on 02/04/2011 14:14 -0400
Despite Treasury being a few post-SFP weeks from stealing Mubarak's M.A.D. spotlight, TBAC minutes reveal just how it will crowd out the private sector permanently (Sack-Frost makes debut appearance).
What are the chances of another banking crisis, this time emanating from Europe? Let me count the ways, but not using Goldman's math of course.
Not all debt is the same, so it would seem. Expect runs on Ireland, Greece and Portugal way before Japan despite the fact Japan has twice the debt as a proportion of GDP!
First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does?Submitted by Reggie Middleton on 02/02/2011 13:38 -0400
So here's what it will look like of the Tunisian/Egyptian/Yemen parade skips across to the EU. Can you spell U-G-L-Y?
This is a warning to prepare for potential stealth bank runs cascading from North Africa and Ireland through to EU regional banking centers. Stealth bank runs are the unrecognized and perilous serpent lurking presently below the European financial surface. They prey on slower moving archaic bond vigilantes and anyone else swimming in these dangerous uncharted waters. Investors need to fully appreciate that a modern bank run looks and operates differently than what is depicted in the movies and what we most likely expect to occur! For starters, it isn't the individual depositor lining up, it's now Corporate CFOs or Treasurers at their terminal en masse! Secondly, it isn't driven by local depositors; it is now driven internationally by Corporate Finance committees! Thirdly, there are no telltale line-ups at bank doors. It is stealth, which will happen in an unexpected electronic 'flash crash' panic blur! Today, a triggering event will initiate global 'key strokes' that will move unprecedented amounts of money within hours.
I am not an economist, but as a strategist I believe there is a case for a multi-year period of weak growth in the US, which could be magnified by an EM slowdown as the EM bloc diverges policy to deal with its own domestic positive output gaps, domestic inflation problems and domestic asset bubbles. The obvious problem is that the US has an excess debt problem and a central bank that seeks to solve asset bubbles that burst by creating new asset bubbles. This policy has been proved a failure. Remember that debt does not equal wealth, that asset bubbles do not equal wealth, that more liquidity does not equal money but instead equals more debt, and that liquidity does not equal capital.
The basic problem is that nobody cares. Cotton, the grains, and oil all go up for the short term. But the long term impact of the Egyptian blow up on the global economy is minimal. But expect volatility to start trending upward from here. There are black swans out there gathering.