Precious Metals

On the back of no news and no fundamental shifts in demand and supply, Silver has cliff-dived 7.5% in the last 3 days, its biggest drop in over a year, as the precious metal heads back towards unchanged on the year. We suspect that, just as with the NatGas story earlier this year (when it went bidless and was justified by endless chatter over what it meant, when in fact it was John Arnold unwinding his positions and closing shop), the moves we are seeing in not just precious metals but copper and across FX are liquidation-related (as we noted yesterday) as fundamentally facts remain the same, given central bank buying of gold into reserves and the Fed set to hit a $4 trillion balance sheet within the next year). Into the 2011 year-end we also saw dramatic 'liquidation-like' plunges in Silver (and gold) as it is very clear that whoever is 'selling' is entirely price-insensitive.

Silver will rise as much as 29% to $40.25/oz, from $31.10/oz today, in 2013. This is based on the median estimate of 49 analysts, traders and investors compiled by Bloomberg. Global investment through silver backed exchange traded products reached a record 18,854 metric tons in November, or more than nine months of mine output, data compiled by Bloomberg show. Holdings are now valued at about $19.2 billion. Bullion dealers all over the world report robust demand for silver and there has been a shift in many Asian and Middle Eastern markets from gold to silver - due to silver's relative cheapness and undervaluation versus gold. According to Bloomberg, one of Singapore’s largest suppliers of coins and bars to retail investors, says sales tripled since October, part of a global surge in demand for silver that drove holdings to a record.

Presented with little comment - but it's that time of the day again...

Blah blah Fiscal Cliff blah. Blah blah blahdy blah Cliff. Cliff blah blah republicans blah democrats blah blah blah blah. Blah blah blah blah, blah blah, blah blah blah blah blah, blah blah, Cliff. Blah blah blah blah, blah blahdy blah.... Blah.

Credit expansion, wrote the great Austrian economist Ludwig von Mises, is not a nostrum to make people happy. "The boom it engenders must inevitably lead to a debacle and unhappiness." That seems a pretty accurate summary of the current situation for the western economies: a debacle, and unhappiness. Von Mises also wrote that "The final outcome of the credit expansion is general impoverishment." And, "What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse." It seems to us that we may be fast approaching the tail end of a 40-year experiment in money. The conventional financial media continue to keep central bankers on their pedestal; such thinking is astounding for the rest of us who know the Emperor's new clothes when we see them.

In March 2012, Okayama Metal & Machinery became the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies. Okayama manages pension funds for about 260 small and mid-sized companies in the Okayama area. "By diversifying currencies, we aim to reduce risks associated with them," said Yoshi Kiguchi, the fund's chief investment officer. "Yields become stable if you put small amounts into as many types of holdings as possible." Of its 40 billion yen ($477 million) in assets, the fund has invested around ¥500 million-¥600 million in gold, he said. Initially, the fund aims to keep about 1.5% of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”. Other pension funds in Japan are following their lead according to the Wall Street Journal. Japanese pension funds are diversifying into gold "largely to mitigate the damage from possible market shocks"... Mitsubishi UFJ Trust and Banking Corporation said it has secured more than Y2 billion in investments from two pension funds for a gold fund it started in March.

Okay, the Fed's recent decision to boost its monetary stimulus (a.k.a. "money printing," "quantitative easing," or simply "QE") by another $45 billion a month to a combined $85 billion per month demonstrates an almost complete departure from what a normal person might consider sensible.

To borrow a phrase from Joel Salatin: Folks, this ain't normal.  To this I will add ...and it will end badly.

• Our markets are now truly broken; they don't send accurate price signals anymore
  
• Markets are now just a giant and rigged casino, where a relative handful of big firms and other tightly coupled players are gaming their orders to take advantage of this flood of money
  
• Expect the Fed balance sheet to quickly expand by an additional $3-4 trillion, resulting in runaway inflation and a possible currency crisis

Imagine a stock - best for the hypothetical exercise is probably a tech stock - rising for 12 years without interruption. A net gain every year, sometimes a small one, sometimes a bigger one, but nicely compounding at an annual yield of more than 17.13% (that's a devilish 666.67% in 12 years). What would people say about this stock? Would there be a steady stream of negative press trying to dissuade people from buying it? We somehow doubt it, although almost every investment that has seen a great deal of appreciation has its detractors (and sometimes they are right). When it comes to gold, one could certainly debate the merits of buying it at what appears at least on the surface as a high price. Gold bulls can only profit from examining bearish arguments, in order to see if they have merit.

A.M. Kitco Metals Roundup: Gold Drops Below $1,700 Following another Mysterious Price Drop in Asian Trading

Gold set for dramatic correction: hedge fund manager

From the open of the US equity market day-session, gold and silver have diverged aggressively. Gold is notably outperforming silver - in fact today is the biggest jump in the Gold/Silver ratio of the year. The Gold/Silver ratio has also retraced upwards to its 50DMA. It seems there is overall pressure on precious metals post-Bernanke but the relative preference is for Gold so far.

Gold bugs can’t understand how the public can be so unaware, how highly intelligent policy makers can be so immoral, and how the mainstream media can be so incurious. We can’t understand why more men and women in the investment business haven’t joined some of the more successful ones that have come around to precious metals and have taken substantial positions in them for their funds and personal accounts. Conventional financial asset selection guidelines for professional investors are becoming increasingly uneconomic and problematic. Current macroeconomic conditions leave little doubt as to why. A zero-bound rate structure across developed economies, heavy monetary policy intervention, guaranteed negative real returns of benchmark financial assets and cash, impossible discount cash flow models,cacophonous (and economically meaningless) fiscal political wrangling diverting attention from legitimate budget arithmetic ($800 billion over ten years when we’re running $1 trillion-plus annual deficits?), dubious short and intermediate-term prospects in already-emerged emerging economies, and non-trending financial markets, all suggest something has changed. Regardless of whether one is investing personally or as a fiduciary, conventional financial asset allocation models and procedures are obviously failing and the reason is simple: the currencies in which financial assets are denominated are gravely flawed.

S&P 500 futures were initially undecided but eventually auctioned up to the highs and pushed on past (though somewhat un-confidently). High-yield credit is bid and leading the ETFs higher. Precious metals and Oil are the winners at the moment though (beta-adjusted) with Treasury yields snapping higher and holding those yield gains. The USD is weakening led by EUR strength (as pressure reverts back to Draghi) but JPY weakness is tempering the overall USD weakness. Energy by far the outperformer post-FOMC as the rest are moving almost entirely systemically with the synthetics (though Tech is lagging). As we post, the initial exuberance is fading across most risk assets.

Turkey’s trade balance may turn on whether President Barack Obama vetoes more stringent sanctions against Iran after the U.S. Senate passed a measure targeting loopholes in gold exports to the Islamic Republic. Turkey’s gold trade with neighbouring Iran has helped shrink its trade deficit over the past year according to Bloomberg. Incredibly, precious metals accounted for about half of the almost $21 billion decline. That’s calmed investor concern over its current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994.  The U.S. Senate voted 94-0 on Nov. 30 to approve new sanctions against Iran, closing gaps from previous measures, including trade in precious metals. Obama, who opposes the move on the grounds it may undercut existing efforts to rein in the nation’s nuclear ambitions, signed an executive order in July restricting gold payments to Iranian state institutions. Turkey exported $11.9 billion of gold in the first 10 months of the year, according to the Ankara-based statistics agency’s website. A very large 85% of the shipments went to Iran and the United Arab Emirates. Iran is buying the gold with payments Turkey makes for natural gas it purchases in liras, Turkish Deputy Prime Minister Ali Babacan told a parliamentary committee in Ankara on Nov. 23.

Gold and silver are up 9.3% and 19% respectively so far this year – thereby outperforming many asset classes again in 2012.

In time, 2012 may be seen as a year of correction and consolidation for the precious metals after the sharp gains and record nominal highs seen in 2011.

UPDATE: In the last few seconds of trading ES jumped 3 points on Buffet comments about Dimon for Treasury and WSJ chatter about Fiscal Cliff progress (ES +4.25pts on day)

We have officially run out of expletives to describe the volumelessness of the equity trading markets. Today's S&P futures volume was dismal - among the lowest volume days of the year (even including holidays and half-days). Today's range was relatively narrow and while risk-assets in general were highly correlated, there was noise and the liquidity was simply not there. AAPL continued its VWAP-based slide - holding NASDAQ back overall - but with MCD's gains accounting for around half of the Dow's gains on the day (and the S&P getting lifted with every VWAP-driven jerk lower in AAPL), it seems the 'buying' interest was largely absent. Treasury yields ended lower, VIX higher (though well off its highs of the day), high-yield credit practically unchanged, and the USD very modestly lower providing just enough impetus to keep the S&P green on the day (and the month +0.15%). The Industrials and Transports have recoupled at +1.2% on the month while the NASDAQ languishes -0.77% since 11/30. Oil was probably the mover of the day with WTI -0.3% - notably awry of the +0.5% gains in Silver and Oil and +1.1% in Copper. Financials lagged and Materials led as the day came to a quiet end around VWAP with the machines well and truly in charge.