Commentary for Thursday, Jan 22, 2015 (
Gold closed up $7.00 at $1300.70 as the European Union finally pulled the
trigger on their plan to lower the price of the euro by printing more
fiat paper money.
European Central Bank President Mario Draghi has been talking about this
strategic monetary change for 2 ½ years but the actual path taken
to help a struggling European Union was hidden behind everything from
strict austerity to the printing press using a US type bond buying program.
The ECB will purchase 60 billion euros in bonds every month until September
2016. This will add liquidity to stimulate the varied economies and the
quantitative easing will supposedly stimulate growth - classic Keynesianism
theory that the government has your back. And of course opposite to the
conservative Monetarist approach which considers the growth of the money supply.
However you want to describe this move – it was considered aggressive
by most. Everyone knew the ECB was going to do something today and most
speculated as to the size of the monetary jolt. The high end of the range
was considered $1 trillion - this amounts to 840 billion euros.
This is much closer to the US reordering of the financial system when during
the 2008 financial crisis it added $3 trillion to its balance sheet. The
market response today was of course a falling euro (1.137) the lowest
in 11 years.
We will have to wait and see but I don't see how the US is going to
raise interest rates considering the falling euro and still unstable oil.
I was surprised however that gold did not move much higher. Eventually
all fiat currency creation will push the price of gold higher but as we
have seen with our own currency this cause and effect response is not
reliable on the shorter term.
Still gold's rather lethargic response might be indicative of a market
looking for a profit taking pull back considering recent gains.
The lowest premium government produced 1 ounce gold coin today is the popular
Silver closed up $0.17 at $18.34 still cheap relative to old highs but
considerably off its recent lows. The lowest premium silver bullion product today would be the Johnson
Mattney 100 oz silver bar at $0.75 over spot delivered.
Platinum closed up $7.00 at $1284.00 and palladium was up $5.00 at $773.00. Like I mentioned yesterday platinum is now trading under the price of
gold and the only bullion 1 ounce coin produced by a world government
is the Canadian Platinum Maple Leaf – other popular world mint coins
have stopped production for the time being.
So with higher prices for gold across the board and activity moving higher
in the Exchange Traded Funds why aren't the phones ringing off the
hook on physical activity? The reason is simple – the higher activity just happened and now
the precious metals are facing the dreaded Wall of Worry.
Actually this happens all the time in stocks but because the metals have
generally traded lower over the longer term it has been awhile since anyone
has considered this cautionary tale.
The proverbial Wall of Worry is created when prices rise dramatically on
the short term and investors wonder if the price rise is the beginning
of a bigger picture which will lead to more profits or some sort of short-term
price trap which will cost them money. In other words they "worry"
over the possibility of adding to their holdings.
If the market can climb over that Wall of Worry it is a true turnaround
and worthy of additional money from the investor. If it can't –
well, you know the answer.
But my point today is that gold has its usual advocates – real bullion
dealers who believe the precious metals are cheap. And those who hang
around - fake bullion dealers who use any excuse to sell overpriced junk
described as the newest and latest thing.
Those that believe the Swiss Franc uncoupling from the euro opened the
door and was a watershed event for gold. Those that believe that European
Union and quantitative easing are the latest savior for those really interested
in gold bullion.
Today you have a real mixed bag in the gold market – you will encounter
everybody from legitimate dealers to quick money hustlers who sound and
look good but are dangerous.
So for the short term ignore all the real or imagined stories and consider
that Wall of Worry. If gold climbs over we are off to the races – if it does not especially
now that we have crossed over the important $1300.00 mark – well
you know that story too.
If you are interested in gold commentary there is a wealth of in-depth
information on the net. Most casual readers are not that interested but
the source for what the Chinese are doing is Koos Jansen (BullionStar.com
Chinese Lunar Year Gold Buying at Full Steam: 61t Withdrawn from SGE Vaults
in 1 Week – "As I
mentioned last week
, January is the time of the year for the Chinese to buy golden gifts for
their love ones. And that is exactly what they are currently doing
en masse, according to the latest data from the Shanghai Gold Exchange (SGE)."
But here is where the internet shines – in the process of reading
Jansen I ran into something totally different – too bad I don't
Guilty Gold by Roel Janssen - Nearly half of the gold looted by the Nazis from the
Dutch central bank during the Second World War remains to this day in
Switzerland, a reminder of the Alpine nation's controversial role
as a financial conduit for Hitler's regime. About 61,000kg of Dutch
war gold, currently value at about €2bn, is believed to be still
in Swiss possession.
During the Nazi occupation of the Netherlands, 145,650kg of monetary gold
and gold coins that Dutch citizens were forced to hand over to the central
bank were transported to the Reichsbank in Berlin. After the war, the
Tripartite Gold Commission (TGC), set up in 1946 by the US, France and
the UK to return gold stolen by Germany, handed back about 71,820kg of
gold to the Netherlands – less than half of the total. In 1998,
the TGC made its final share-out and was dissolved.
Looting of Dutch gold - The story of the looting of Dutch gold and how it ended up in Switzerland
is told in my 'faction' thriller Fout Goud (Guilty Gold). The
book, which is currently only published in Dutch, combines historical
facts with a fictional plot.
The Reichsbank sold about 80% of the gold it stole from occupied countries
to Switzerland to obtain convertible Swiss francs to pay for imports needed
by Germany's war machine. Smaller amounts were sold to Sweden, Spain,
Portugal and Turkey.
In December 1946, Switzerland and the US, acting on behalf of the TGC,
signed the Washington Agreement. The Swiss, who denied any wrongdoing
by buying gold from Germany during the war, agreed to hand over 52,000kg
of gold to the commission for the 'economic recovery of Europe'.
The Agreement gave Switzerland a waiver for any future claims on gold
it had bought from Nazi Germany.
A few years later it became clear that Switzerland had bought at least
336,300kg of gold from Germany during the war. Of the Dutch gold that
was transported to Berlin, about 122,000kg ended up in Switzerland.
When the Dutch demanded their gold back, the Swiss refused to discuss the
claim, citing the Washington Agreement. Despite arduous diplomatic and
legal efforts in the 1950s and 60s the Swiss were adamant: returning any
more gold was out of the question.
When the TGC was dissolved at a conference in London, the Netherlands stated
that it maintained its claim against Switzerland. Two years later, the
Dutch government endorsed the conclusions of a national war-gold commission
that further efforts to recover the gold were futile.
Neither Parliament nor Dutch society was told about the decision silently
to shelve claims on the stolen war gold that remained in Swiss vaults.
In 1996, publications in the UK stirred up the question of Jewish gold
and dormant Jewish bank accounts in Switzerland. In the end, Swiss banks
were forced to repay $1.25bn to Jewish victims. The Swiss government added
$500m to the settlement, though it denied any wrongdoing. The value of
the Jewish gold was much smaller than the stolen monetary gold.
In my fictional retelling of the looted Dutch gold, the main protagonist
inherits 15 gold coins from his grandmother. He decides to find out what
happened to the gold during the war.
His search takes him to underground shelters and bunkers in Berlin and
to the salt mine in Merkers, where the American Third Army discovered
the remains of the Reichsbank's gold reserves in the final weeks of
the war. The story ends with a spectacular attempt to recover a gold bar
Fout Goud (Guilty Gold) was published in Dutch on February 20, 2014, and
launched at the Dutch central bank, De Nederlandsche Bank.
Ambrose Evans-Pritchard (The Telegraph) -
Central bank prophet fears QE warfare Pushing World Financial System out
The economic prophet who foresaw the Lehman crisis with uncanny accuracy
is even more worried about the world's financial system going into 2015.
Beggar-thy-neighbor devaluations are spreading to every region. All the
major central banks are stoking asset bubbles deliberately to put off
the day of reckoning. This time emerging markets have been drawn into
the quagmire as well, corrupted by the leakage from quantitative easing
(QE) in the West.
"We are in a world that is dangerously unanchored," said William
White, the Swiss-based chairman of the OECD's Review Committee. "We're
seeing true currency wars and everybody is doing it, and I have no idea
where this is going to end."
Mr White is a former chief economist to the Bank for International Settlements
– the bank of central banks – and currently an advisor to
German Chancellor Angela Merkel.
He said the global elastic has been stretched even further than it was
in 2008 on the eve of the Great Recession. The excesses have reached almost
every corner of the globe, and combined public/private debt is 20pc of
GDP higher today. "We are holding a tiger by the tail," he said.He
warned that QE in Europe is doomed to failure at this late stage and may
instead draw the region into deeper difficulties. "Sovereign bond
yields haven't been so low since the 'Black Plague': how much
more bang can you get for your buck?" he told The Telegraph before
the World Economic Forum in Davos.
"QE is not going to help at all. Europe has far greater reliance than
the US on small and medium-sized companies (SMEs) and they get their money
from banks, not from the bond market," he said.
"Even after the stress tests the banks are still in 'hunkering
down mode'. They are not lending to small firms for a variety of reasons.
The interest rate differential is still going up," he said.
The warnings come just as the European Central Bank prepares a blitz of
bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect
QE of around €500bn now that the eurozone is already in deflation.
Even the Bundesbank is struggling to come with fresh reasons to oppose it.
The psychological potency of this largesse will depend on whether the ECB
opts for shock-and-awe concentration or trickles out the stimulus slowly.
It also depends on the exact mechanism used to conduct QE, a loose term at best.
ECB president Mario Draghi hopes that bond purchases will push money out
into the broader economy through a "wealth effect", but critics
fear this will be worse than useless if it leads to an asset bubble without
gaining traction on the real economy. Classic moneratists say the ECB
may end up spinning its wheels should it merely try to expand the money base.
Mr White said QE is a disguised form of competitive devaluation. "The
Japanese are now doing it as well but nobody can complain because the
US started it," he said.
"There is a significant risk that this is going to end badly because
the Bank of Japan is funding 40pc of all government spending. This could
end in high inflation, perhaps even hyperinflation.
"The emerging markets got on the bandwagon by resisting upward pressure
on their currencies and building up enormous foreign exchange reserves.
The wrinkle this time is that corporations in these countries –
especially in Asia and Latin America – have borrowed $6 trillion
in US dollars, often through offshore centers. That is going to create
a huge currency mismatch problem as US rates rise and the dollar goes
Mr White's warnings are ominous. He acquired great authority in his
long years at the BIS arguing that global central banks were falling into
a trap by holding real rates too low in the 1990s, effectively stealing
growth from the future through "intertemporal" effects.
He argues that this created a treacherous dynamic. The authorities kept
having to push rates lower with the trough of each cycle, building up
ever greater imbalances, in an ineluctable descent to the "zero bound",
where monetary levers stop working properly.
Under his guidance, the BIS annual reports over the three years before
the Lehman crisis were a rising crescendo of alarm calls at a time when
other global watchdogs were asleep. His legendary report in June 2008
openly discussed whether the world was on the cusp of events that might
prove as dangerous and intractable as the Great Depression, as indeed it was.
Mr White said central banks have been put in an invidious position, compelled
to respond to a deep economic disorder that is beyond their power. The
latest victim is the Swiss National Bank, which was effectively crushed
last week by greater global forces as it tried to repel safe-haven flows
into the franc. The SNB was damned whatever it tried to do. "The
only choice they had was to take a blow to the left cheek, or to the right
cheek," he said.
He deplores the rush to QE as an "unthinking fashion". Those
who argue that the US and the UK are growing faster than Europe because
they carried out QE early are confusing "correlation with causality".
The Anglo-Saxon pioneers have yet to pay the price. "It ain't
over until the fat lady sings. There are serious side-effects building
up and we don't know what will happen when they try to reverse what
they have done."
The painful irony is that central banks may have brought about exactly
what they most feared by trying to keep growth buoyant at all costs, he
argues, and not allowing productivity gains to drive down prices gently
as occurred in episodes of the 19th century. "They have created so
much debt that they may have turned a good deflation into a bad deflation
The walk-in cash trade was busy most of the day with a good mix of buying
and selling. The phones were mostly buyers and steady until the afternoon
when everything stopped.
Unscientific Activity Scale is a "
4" for Thursday. The CNI Activity Scale takes into consideration volume
and the hedge book: (last Friday –
2) (Monday – closed) (Tuesday –
5) (Wednesday –
3). The scale (1 through 10) is a reliable way to understand our volume
numbers. The Activity Scale is weighted and is not necessarily real time
– meaning we could be busy and see a low number – or be slow
and see a high number. This is true because of the way our computer runs
what we call the "book".
Our "activity" is better understood from a wider point of view.
If the numbers are generally increasing – it would indicate things
are busier – decreasing numbers over a longer period would indicate
volume is moving lower.
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