Precious Metals

When two weeks ago we exposed the heretofore secret location of JPM's London gold vault (located under the firm's massive L-shaped office complex at 60 Victoria Embankment) we thought: what about New York? After all, while London is the legacy financial capital of the "old world", it is in New York that the biggest private wealth of the past century is concentrated, and it is also in New York where the bulk of the hard assets backing the public money of the world's sovereigns are located, some 80 feet below ground level in the fifth sub-basement of the New York Fed, resting on the bedrock of Manhattan. That the topic of the gold "held'' by the New York Fed - historically considered the gold vault with the largest concentration of gold bars in the world - has become rather sensitive, in the aftermath of the Bundesbank's request to repatriate it (surely, but very, very slowly), is an understatement. Yet in the aftermath of some of the revelations presented here, we believe quite a few other countries will follow in Germany's footsteps for one very simple reason: suddenly the question of whether their gold is located at 33 Liberty, or just adjacent to it, in what we have learned is the de facto largest private gold vault in the world, located across the street 90 feet below 1 Chase Manhattan Plaza, doesn't appear to have a clear answer.

Though a gold bull, I called for a correction late last year and believe more downside is likely from here.

We really hate to beat a dead horse, but we wouldn’t be doing my job for you if we didn’t point out some of the most intellectually dishonest, self-aggrandizing Bernanke-speak to come out of the Fed Chairman’s testimony this week. I know this goes without saying, but entrusting this man with your life savings is a dangerous course of action. I strongly urge you to consider diversifying into precious metals, productive farmland, or even a digital currency like Bitcoin. After all, you know the old saying – it’s time to be very concerned when the politicians and bureaucrats tell you to not be concerned.

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the amount of money that can be transferred out of the country; another is limiting the amount of cash that can be withdrawn from accounts; a third is the government mandates private capital must be invested in government bonds.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?

The best performing currency year-to-date has no home country, no central banker and no physical scrip; it is the online-only ‘Bitcoin’ and as we noted recently, it is becoming more mainstream.  BTC, as the currency is known, up 130% year to date in dollar terms, thanks to rising demand from a wide variety of adherents, which ConvergEx's Nick Colas notes, includes libertarian activists, small businesses, online drug dealers and gambling sites.  That makes the Bitcoin a controversial subject, to be sure, but Nick notes we can also learn from this unique case study a lesson in global economics.  Bitcoin ‘Money supply’ growth is capped at a slow rate – far below its current levels of demand.  That makes it prone to boom-bust cycles.  It also has no sovereign sponsorship, which means it works outside any nation’s security apparatus.  Lose your bitcoins to hackers?  Tough luck – there is no FDIC in these parts.  Still, Colas concludes, in the creation and growth of the Bitcoin it is not hard to see the online future of currency, especially as real-world alternatives continue to struggle with sluggish economies.

We noted the strange divergence between the surge in physical demand for precious metals and the falling price of gold and silver yesterday and today; sure enough, just as they give back some short-term gains, we find that with one day left in the month, the US Mint has seen the largest demand for physical silver coins ever for a February at 3.37mm ounces. We are sure this all makes perfect sense somewhere in the leasing, backwardation, securitization, paper world of precious metals pricing but one thing appears sure, more than just Russia is backing up the truck for physical bullion.

It has been yet another quiet overnight session, devoid of the usual EURUSD ramp, and thus ES, at the Europe open (although it is never too late), which has seen the Shangai Composite finally post a meaningful rise up 2.26%, followed by some unremarkable European macro data as Eurozone CPI came as expected at 2.0%, and German unemployment just a tad better, at -3K, with consensus looking for 0K. Italy continues to be the wildcard, with little clarity on just who the now expected grand coalition will consist of. According to Newedge's Jamal Meliani, a base case scenario of Bersani/Berlusconi coalition may see a relief rally, tightening 10Y BTP/bund spread toward 300bps. A coalition would maintain current fiscal agenda and won’t implement any major reforms with fresh elections being     called within a year. A Bersani/Grillo coalition is least likely, may slow reforms which would see 10Y BTP/bund spreads widening to 375bps. Of course, everything is speculation now, with Grillo saying no to any coalition, and moments ago a PD official saying against a broad coalition. But at least the market has it all priced in already - for more see Italy gridlock deepens as Europe watches nervously.

Bernanke gave more testimony on Wednesday emphasizing and defending all Fed policies. He successfully parried all questions about QE and ZIRP risks and made no mention of any policy exit dates. Bulls translation, the printing press will be on “auto” to infinity.

Interesting testimony tidbits were:

“Fed could go some time without sending profits to Treasury,” (Fed is allowed to be a deadbeat).

“Savers will benefit with economic recovery; savers won't get strong returns in a weak economy,” (So not in my lifetime?).

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.

Equities dead-cat-bounced today on minimal upside volume (and low average trade size) to get the S&P back to unchanged for the month. Broadly speaking risk-assets stayed well correlated with stocks though bonds and the USD looked somewhat dead trading in a very small range given recent shenanigans. Gold and Silver had their best day of the year so far as the former broke back over $1600 (and has now seen the best 4-day jump in 6 months). It seems Bernanke's relative dovishness is losing its equity appeal (as gap prices continue to rise) but precious metals (post China new year) have rediscovered some central bank balance sheet reality. Homebuilders, buoyed by the craziest seasonal adjustments ever to sales, swung from worst-to-first on the week. Equities tracked spot VIX most of the day but even VIX did not fully partake of the exuberance in the last hour or so. AAPL's rumor-driven tom-foolery pushed it handily up to yesterday's closing VWAP +1.4% and supported the broad equity market (just as HD did in the Dow). Despite the best efforts of the media, putting lipstick on this pig day after yesterday is a push in our view.

February has been an odd month for precious metals to say the least. On-again, off-again fears of Bernanke removing the punchbowl (and endless sell-side strategists discussing Great Rotations and the end of the gold cycle) have led to prices for gold and silver sliding notably. However, while all this price deterioration has been going on, demand for physical gold and silver has surged - entirely disconnecting from January's apparent demand-to-price correlation - and Silver set to break all-time record demand highs for a February. We know who was buying in January, as Reuters reports Russia and Turkey were significantly adding to their bullion reserves; and while the divergence between demand and price coincided with Chinese New Year - leaving a large marginal buying nation on the sidelines - we suspect the drop is more to do with hedge fund reflexive selling - now caught offside. It seems at least one smart player was using lower prices to build their stack; manipulation or no manipulation.

It would appear that someone tripped and flipped the algo switch this morning as the ubiquitous morning slamdown has morphed into a take-off. Perhaps it is no coincidence that every Muppet's favorite banker (cough Goldman Sachs cough) opined on Gold's coming weakness yesterday and that hedge funds are the least exposed to the precious metals on record, which as everyone BUT Goldman knows, is the traditional signal that it is a time to buy. Actually we take that back: Goldman certainly knew it, which is why it has been urgently advising its clients to sell... To Goldman.

One of the least well-known precious metals continues to shine brightly this year - palladium.

Italy’s politics were turned upside down yesterday after the election resulted in the dissident, 5-Star Movement of comic Beppe Grillo creating the strongest party in the country, but left no group with a clear majority in parliament. This political uncertainty weighed on the euro as Italy is the Eurozone’s 3rd largest economy. Bullion’s gains were limited as investors await the Federal Reserve chief Ben Bernanke’s semi-annual testimony to U.S. Congress before the Senate Banking Committee today, and tomorrow he visits the U.S. Housing Financial Services Committee. A dovish statement from Bernanke will support gold.  European stocks declined as Italy’s inconclusive parliamentary election renewed concern that the region’s sovereign-debt crisis will deepen. This follows falls on Wall Street yesterday and Asian falling overnight. Huge complacency and even denial about the debt crisis and suggestions that it had been resolved have contributed to investors selling physical gold in recent days. 

While the market will do everything in its power to forget yesterday's Hung Parliament outcome ever happened, and merrily look forward to today's Bernanke testimony (first of two) before the Senate, Europe is not quite so forgiving. Because moments after today's Italian Bill auction in which the now government-less country sold €8.75 billion in 6 month bills at a yield of 1.237% nearly double the 0.731% yield for the same issue previously, things went bump in the night, leading Italian 2Y yields to surge +38bps to 2.086%, vs 2.063% earlier, while the benchmark Italian 10Y yields soared +28bps to 4.766%, vs 4.739% earlier, and just shy of JPM's 5% target. Spain is not immune from the Italian developments, and while it will take the market some time to realize that the next political scandal may be dropping this time in Spain (as reported yesterday), the Spanish 10 Year is already up 7% to 5.23%. Suddenly talk of parity between Italy and Spain may be on the table all over again. And while unlike yesterday there is US macro data, in the form of US consumer confidence, new homes sales and house price data, all the market will care about is soothing Wall Street sellside spin that Italy is not really as bad as everyone said it would be if precisely what happened, happened. With the EURUSD on the verge of breaking down the 1.3000 support, it is very unclear if they will succeed.