PIMCO

At least he did not say Tungsten...

Gross: Stock and bond managers today must be alchemists: turn lead into gold. NOT likely. Too much lead (bubbled assets).

— PIMCO (@PIMCO) October 9, 2012

Given the Fed's ZIRP impact on expected returns, PIMCO notes that those approaching retirement have three choices: a) save more, b) work longer, or c) tighten their belts in retirement. If everyone saves more, we consume less, and therefore GDP growth slows down. Anemic growth leads to a Fed on hold for a prolonged period - and even further lowered return expectations in an ugly paradox-of-thrift-like feedback loop. PIMCO has found a concerning empirical link between lower rates and longer periods in the workforce as a higher fraction of older Americans remain employed. This has the structurally dismal impact of reducing (implicitly) the level of 'prime working age' employment and has 'convexity' - in other words, the lower rates go, the greater the inertia of the elderly to stay in the workforce. Intuitively, low rates leading to longer work lives just makes sense – especially in an era where fewer retirees will draw defined benefit pensions. This is why some of us are wondering if the Fed is spinning its wheels by sticking to the old model of trying to stimulate growth. So expect lower-rates and longer working years or go all-in on HY CCC debt with 20% of your savings.

In a post entitled 'Mugabenomics: Inflation in UK Higher than in Zimbabwe,' Guido Fawkes points out how the Liberal Democrats Vince Cable once warned that Quantitative Easing (QE) was “Mugabenomics.” This was prior to coming to power and a swift u-turn which would make even the most slippery politician proud. Remember when Vince Cable warned that Quantitative Easing (QE) was “Mugabenomics”? Vince flip-flopped on that even before he joined the coalition.  Guido Fawkes then reminds its readers about the time when George Osborne said “Printing money is the last resort of desperate governments when all other policies have failed.”  Alas as the blog rightly warns, "In government Osborne has overseen the printing of more money than any other Chancellor in British history. A quarter of the national debt – all this government’s overspending – has been bought by the Bank of England via QE."  “So it is not a shock that inflation in Zimbabwe (3.63%) is now lower than inflation in the UK (3.66%, August 2011-July 2012).” Those who have been warning about this monetary madness for some years are gradually being proved right

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.... We realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system.

Technical indicators such as MACD, RSI and STO show that silver is slightly overbought short term.

However, silver can remain overbought in the short term as was seen in silver’s rally in 2011 when silver nearly doubled by surging from below $27/oz to nearly $50/oz in just 3 months - from January 27th 2011 to April 28th 2011.

When it comes to investing in gold, investors often see the world in black and white. Some people have a deep, almost religious conviction that gold is a useless, barbarous relic with no yield; it’s an asset no rational investor would ever want. Others love it, seeing it as the only asset that can offer protection from the coming financial catastrophe, which is always just around the corner. PIMCO's views are more nuanced and, we believe, provide a balanced framework for assessing value. Their bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies.

We discussed the unintended consequence of QEternity previously as we noted the massive front-running of the Fed's MBS buying program that was occurring as 30Y current coupon mortgage bond yields were tumbling. While the last week or so has seen Treasury yields reverse their rising trend, the trend of front-running the Fed has not abated. In what, quite frankly, stunned us more than Sofia Vergara's wardrobe malfunction this weekend, we note that today the spread between the 30Y FNMA CurCpn mortgage bond (at 1.66%) and 10Y US Treasuries has smashed to incredible all-time lows of around 3bps. The day before QEternity, this spread was 60bps - having been over 100bps at the start of June 2012. The previous low from July 2010 of 54bps has been obliterated as Bernanke has managed to remove one more market from the lexicon of risk (and in the meantime, PIMCO's Bill Gross has earned back his 'bond guru' title by making a killing). Can we see Mortgage yields trade inside of Treasury yields?

The old 'new normal' bond guru succinctly sums up Bernanke's failed logic with QEternity in 80 characters...

Gross: Fed buys Mtges but banks fail to pass through lower yields to future home buyers.

— PIMCO (@PIMCO) September 21, 2012

Gross: #Fed to buy mortgages ‘til the cows come home. Think 7% unemployment, 2.5% inflation targets. Buy real assets…gold…a house!

— PIMCO (@PIMCO) September 14, 2012

While others were buying TSYs in the month of August on hopes of frontrunning the central printer, and expectations that Bernanke's NEW QE announcement will lead to even more flattening in the curve (even though as we explained there is only $650Bn in free 10-30 year private sector inventory available in the entire market), Bill Gross, via PIMCO's flagship Total Return Fund, was busy selling. So busy in fact that over $30 Billion in US paper was dumped to unwitting investors, resulting in the move wider by the 10 Year paper which at auction earlier today priced at a multi-month high yield. As a result at the end of August, PIMCO's total Treasury exposure was just 21% of total AUM, the lowest since August 2011. And what did Pimco do with the proceeds? Nothing - it merely satisfied its margin cash position, which plunged from -18% to -6%.

Bill Gross may be credited with inventing the term 'the New Normal', although his recommendation to purchase gold above all other asset classes, something which only fringe blogs such as this one have been saying is the best trade (in terms of return, Sharpe Ratio, and the ability to sleep soundly) for the past three and a half years, he is sure to be increasingly ostracized by the establishment, and told to take all his newfangled idioms with him in his exile to less than serious people land. Which takes us to David Rosenberg, who today revisits his own definition of the New Normal. And it, too, is just as applicable as that of the Pimco boss: "The new normal is that the economy doesn't drive markets any more." Short and sweet, although it also is up for debate whether the economy ever drove the markets in the first place. But that would open up a whole new conspiratorial can of worms, and is a discussion best saved for after Ben Bernanke decides to save the "housing market" by buying more hundreds of billions in MBS and lowering mortgage yields further, even though mortgage rates already are at record lows (something that mortgage applications apparently couldn't care less about as we showed last week), while "avoiding" to do everything in his power to boost the S&P, which recently was at 5 year highs, and certainly "avoiding" to listen to Chuck Schumer telling him to do his CTRL+P job, and "get to work" guaranteeing Schumer's donors have another whopper of a bonus season.

Even Bill Gross Admits that Gold Holds Its Value, While - In an Era of Central Bank Money Printing- Paper Money Doesn't

• Jobs Gauge Carries Election Clout (WSJ)
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0 (Blooomberg)
• Rajoy stance sets stage for EU stand-off (FT)
• China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
• Hollande faces questions on tax pledge (FT)
• Putin Looks East for Growth as Debt-Ridden Europe Loses Sheen (Bloomberg)
• Strike Grounds Half of Lufthansa's Flights (Spiegel)
• The weakest will win in the euro battle (FT)
• Hilsenrath: Fed Economic, Interest Rate Forecasts Will Include 2015 Outlook (WSJ) - because he just figured that out
• Obama Presses Plan for U.S. Resurgence (WSJ)
• Hong Kong to Restrict Sales of Homes at Two Sites to Locals (Bloomberg)
• Drought Curbs Midwest Farm-Income Outlook, St. Louis Fed Says (Bloomberg)

Having operatied for years under ZIRP, and with the NIRP neutron bomb just around the corner, and already implemented in various European countries, one question remains: can banks be banks, i.e., can they make money, in a world in which borrowing short and lending long, no longer works, courtesy of ubiquitous and pervasive central planning which is now engaged solely and almost exclusively (the other central bank ventures being of course to keep FX rates and equities within an acceptable range) on the shape of the yield curve. Since 2009 our answer has been a resounding no. Today, Bill Gross speaks up as well, and his answer is even more distrubing: "If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over." Indeed, according to Gross central banks have now clearly sown the seeds of the entire financial system's own destruction. That he is right we have no doubt. The only question: how soon until he is proven right.

The technical picture for Euro gold looks near perfect now. Gold has been trending higher since May. The long term charts show a series of higher lows and higher highs and even in the correction of recent months there have been a series of higher lows and gold gradually consolidated between €1,200 and €1,400/oz. Gold is now comfortably above the 50, 100 and 200 day moving averages. In the last four years, there have been 3 periods of correction and consolidation which have lasted 12 to 13 months (see boxes in first chart) and we appear to be coming to the end of another such period. Break outs from such consolidations often lead to sharp moves higher and thus new record highs above €1,359/oz and possibly over €1,600/oz should be seen before the end of 2012. The fundamental back drop of the unresolved Eurozone debt crisis , deep divisions in the ECB and a high degree of uncertainty regarding the euros long term future strongly suggest that the euro will continue to fall against gold in the coming months. Further confirmation of robust demand for gold is seen in figures showing that exchange-traded products backed by the gold expanded to a record. Smart money from Paulson to Soros to PIMCO continues to diversify into gold. Gold ETFs holdings have now surpassed Italy to become the world’s third-largest gold holdings when compared with national gold reserves.