Yen

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South Africa's gold output fell again in January and was down a very large 11.3% in volume terms in January.  Annual gold production is set to be close to 220 tonnes which is a level of gold production not seen since 1922 (see chart below). The falls were seen only in the gold market with production of other minerals holding up with total mineral production down only 2.5% compared with the same month last year. South Africa as recently as two decades ago was the world's largest producer of gold by a huge margin. Only 40 years ago South Africa produced more than 1,000 tonnes of gold per annum but will only produce some 220 tonnes in 2012. Production peaked in 1970 and has been falling steadily and sharply since. The nearly 80% fall in South African gold production has led to it being recently overtaken by China, Australia and the U.S.  It is now even at risk of being overtaken by Russia. The massive 11.3% decline in South Africa was more than even that seen in December when gold output fell by 8.2%. The continuing output decline is due to many of the country's biggest gold mining operations having reached the ends of their lives and having closed down.

Relatively quiet overnight session in the markets, where Europe has seen several bond auctions, most notably in France and Spain, whose good results has in turn sent the German 30 Year Bund yield to the highest since December 12, all courtesy of the recently printed (and collateralized with second and third-hand Trojans) $1.3 trillion. Per BBG, Spain sold 976 million euros of 3.25 percent notes due April 2016 at an average yield of 3.37 percent. The bid-to-cover ratio was 4.13, compared with 2.21 when the notes were sold in January, the Bank of Spain said in Madrid today. It also auctioned 2015 and 2018 securities. France sold 3.26 billion euros of benchmark five-year debt at an average yield of 1.78 percent. The borrowing cost for the 1.75 percent note due in February 2017 was less than the yield of 1.93 percent at the previous sale of the securities on Feb. 16. Elsewhere, we got confirmation of the collapse in Greece, where Q4 unemployment rose to 20.7%, up from 17.7% in the prior quarter. China weighed on Asian market action again following ongoing concerns about domestic property curbs, and a slide in the Chinese Foreign Direct Investment of -0.9% on Exp of +14.6%. ECB deposit facility usage, primarily by German banks, was flattish at €686.4 billion, while in Keynesian news, Italian debt rose to a new record in January of €1.936 trillion. Watch this space, once inflection point occurs and vigilantes realize that not only has nothing been fixed in Italy, but the current account situation in Italy, and Spain, is getting progressively worse as shown yesterday, all at the expense of Germany.

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"Rationalising away the imminent risk of inflation, the Fed leaves the door wide open for a QE3 announcement in April."

While hardly an opinion that would be questioned around these parts, it is still good to see that even some of the smart money shares our views about the Schrodinger Economy ('alive' and 'dead' at the same time, depending if the BLS or anyone else is observing it) and we are not totally insane vis-a-vis one-time, non recurring government bailouts, which just incidentally have become perpetual and endless: "The Federal government has manfully stepped up to fill the gap left by consumers who have been forced to retrench and who are trying to repair their finances by paying down debt and increasing their savings.  So the next question has to be:  Is this recovery self-sustaining or is the economy still on life support, held together by periodic massive liquidity injections and ultra low interest rates, and accompanied by a dangerous, if not reckless, expansion of government debt?  We think that if government programs were canceled, the economy would collapse back into severe recession." And here Balestra's Chris Gorgone explains quite astutely why anyone betting on a decoupling or perpetual USD reserve status may want to reconsider: "the U.S. is no longer in complete control of its own destiny.  We exist now in a world of increasing correlation in the arenas of economics, finance, trade, politics, etc.  What happens in Europe, China, the Middle East, etc. will have major impacts on American economic, political, and social outcomes.  The world is changing  rapidly.  The old rules that so many investors rely upon may no longer apply the way they did during the great growth years after World War II." Alas, this too is spot on.

While hardly expecting anything quite as dramatic as the default of a Eurozone member, an epic collapse in world trade, or a central banker telling the world that "he has no Plan B as having a Plan B means admitting failure" in the next several days, there are quite a few events in the coming week. Here is Goldman's summary of what to expect in the next 168 hours.

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Following a busy overnight session, which saw a surprise announcement out of the Brazilian Central Bank cutting rates more than expected, and confirmation of the deterioration in the Japanese economy where January saw a record current account deficit, today we have already seen the Bank of England proceed as expected keeping its key interest rate unchanged (at 0.50%) and QE fixed at GBP325 billion. The ECB is next with its rate announcement, expected to keep things on hold. Yet the mood of the morning is set by speculation that the Greek debt swap may see a sufficient participation rate for the PSI to go through, even if that means CAC activation, as somehow a Greek default is good, and only an "out of control" bankruptcy would be bad. That coupled with renewed expectations of more QE, sterilized or not, and hopes that tomorrow's NFP will be better than expected, as somehow the Fed will pump money even if the economy is "improving", is all that is needed to send the post-roll ES contract to session highs nearly 1% higher than yesterday's close.

"We are a hair's breadth or, more exactly, one recession away from a market panic on outright deflation -- a panic that will send the central banks into a printing frenzy that will make their balance sheet expansion so far seem like a warm-up act for the main show." Albert Edwards

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Not many websites, analysts or authors have both the balls/temerity & the analytical honesty to take Goldman on. Well, I say.... Let's dance! This isn't a collection of soundbites from the MSM. This is truly meaty, hard hitting analysis for the big boys and girls. If you're easily offended or need the 6 second preview I suggest you move on.

For those who are in a hurry today, the bottom line is that Japan is in serious trouble right now and is a top candidate to be the next black swan. Here are the elements of difficulty that concern me the most, each one serving to reduce Japan's economic and financial stability:

• The total shutdown of all 54 nuclear plants, leading to an energy insufficiency
• Japan's trade deficit in negative territory for the first time in decades, driven largely by energy imports
• A budget deficit that is now 56% larger than revenues (!!)
• Total debt standing at a whopping 235% of GDP
• A recession shrinking Japan's economy at an annual rate of 2.3%
• Renewed efforts underway to debase the yen

As I wrote a shortly after the earthquake in March 2011, Japan is facing an economic meltdown. If it is not careful, it may well face a currency meltdown, too. These things take time to play out, but now almost exactly a year after the devastating earthquake of 2011, the difficulties for Japan are mounting -- as expected.

Citigroup have said that they believe that gold will rise to $2,400/oz in 2012 and by $3,400/oz in “the coming years”. However, Citi’s Tom Fitzpatrick warned of price weakness in the short term and said there is a “real danger” that there may be a correction to $1,600/oz which would provide an even better buying opportunity. Citi are also cautious near term on oil and silver. Production of gold in Australia slid again last year, despite gold fetching higher nominal prices than ever before. According to gold experts, Surbiton Associates, 264 tonnes of gold were produced last year, two tonnes less than in 2010. The 264 tonnes equated to about 8.5 million ounces and ensures that Australia remains a major player in gold, with only China producing more last year. The United States was the world's third-biggest producer with 240 tonnes. Australia's gold production was well below the nation's production peak in the late 1990s.  This further suggests the possibility of peak gold production. Of the world’s four biggest gold producers (China, Australia, the U.S. and South Africa), only China has managed to increase gold production in recent years and this Chinese gold is used in China to meet the rapidly growing demand for gold jewellery and coins and bars as stores of value in China.

In his latest piece on popular delusions, SocGen's Dylan Grice conducts a much needed advance thought experiment looking at two specific things: on one hand he isolates the next inevitable social tension: that between "everyone" and the central bankers. Because if there is one specific reason why OccupyX never truly got off the ground is that deep down, the population knows that while bankers are to be despised for their "contributions" to society, they would never have the opportunity to do what they do absent the enabling stance of the "democratically" elected politicians, and more importantly, the deeds of those few academics stuck in a dark room, who daily decide the nominal fate of the world courtesy of money printing. Which means that in the inevitable progression of "marginalizing-then-brutalizing", when society finally cuts through all the noise and focuses on the one source of all that is wrong in the world, it will not be those residing at 200 West, but the tenants at the Marriner Eccles building: "Politicians can and will take back what they have previously given if and when it is deemed in their interests to do so. One way they do this is by using the time-tested political strategy known as “marginalise-then-brutalise”. Politicians start by identifying the obstacle to their objectives. For a government short of funds the objective is to raise more funds, and the obstacle is any group/sector which has them." Thus Mugabe “marginalised then brutalised” white farmers, while Hugo Chavez set his sights on private sector “profiteers” … for Hitler it was the Jews, for Philip IV of France it was the Knights Templar, for Diocletian it was the Christians, etc. How long before it is the central banks?" How long indeed? And whether it is with or without political prodding, once the central planning experiment fails, as it will, we would certainly not want to be in Bernanke's shoes...