New From Sprott: "Have We Lost Control...Yet?"

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Fri, Jun 28, 2013 - 9:30am

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Have we lost control yet?
By Eric Sprott & Etienne Bordeleau


Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. It all started on May 22nd, 2013, at a Testimony to the US Congress Joint Economic Committee, where he first hinted at tapering the Fed’s quantitative easing (QE) program. Then, on Wednesday, June 19th, during the press conference following the FOMC meeting, the Chairman outlined the Fed’s exit strategy from QE.

Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds) (Figure 1A). Moreover, the yield starved, hot money that had flown to emerging markets has been rushing for the exits, triggering significant declines in emerging market (EM) equity and bond markets (Figure 1B). Finally, the prospect of the end of monetary accommodation has triggered rapid and significant decreases (increases) in the price (yield) of longer dated Treasury bonds (also Figure 1B).

FIGURE 1A: VOLATILITY INCREASING FIGURE 1B: ASSET PRICES DECLINING


It has been clear to us for some time that the Fed was uncomfortable with the relative certainty (i.e. Bernanke Put) that has prevailed in the markets since the introduction of QE-infinity last fall. Officials definitely wanted the market to start thinking about a future without non-conventional monetary policy. However, we seriously doubt that the resulting chaos is what they had anticipated. This was evident in the Chairman’s response to a journalist’s question about the rapid rise in rates, saying the FOMC was “a little puzzled by that”.1 The genie is really out of the bottle now.

Indeed, we believe that the recent “market appeasement rhetoric” by James Bullard and Narayana Kocherlakota (Presidents of the St. Louis and Minneapolis Federal Reserve, respectively)2,3 are further proof that the Federal Reserve has realized it went too far and that it is now in damage control mode. (Update: William Dudley, President of the New York Fed mentioned in a June 27th speech that “asset purchases would continue at a higher pace for longer” if the economy was to grow slower than the FOMC’s estimate)4.

However, as the Bank for International Settlements (BIS) so elegantly put it in its most recent annual report, “[…] central banks continue to borrow time for others to act. But the cost-benefit balance is inexorably becoming less and less favourable.” To this they add: “expectation that monetary policy can solve these problems [deleveraging, financial stability] is a recipe for failure”.5 Clearly, the Federal Reserve knows this and wants to exit their QE program. But can they really?

A large portion of the current economic growth depends on housing. However, mortgage rates are closely tied to long-term treasury rates. While housing affordability is still relatively good because of low house prices, significantly higher mortgage rates might slow the housing market. Furthermore, banks are still very cautious about lending and most borrowers have difficulty accessing credit. While gentle increases in yields are good for banks (who lend long and borrow short), meteoric increases in yields (as in Figure 1B) are damaging because they are hard to hedge and create large losses on the banks securities portfolios (mostly composed of government bonds and mortgage-backed securities) as well as mark-to-market losses on their derivatives portfolios. So, the large and rapid increases in rates the talk of tapering has engendered will damage the economic growth the Fed has been working so hard to engineer, potentially requiring even more stimulus down the line.

The US government itself would also suffer from increases in yields. In its Annual Report, the BIS shows that even a small increase in interest rates would have a large impact on the projected government debt-to-GDP ratio. As shown in Figure 2, under the CBO’s base case scenario (bottom line), the US debt-to- GDP ratio would hover around 110%, whereas a 1% increase in rates would take it to 118% in 10 years (middle line). According to the Chairman’s comments, the fiscal drag that has been partly to blame for the lackluster performance of the economy should subside going forward. But, larger debt servicing costs (because of higher rates) will put more pressure on government finances, forcing it to spend an ever increasing portion of its budget on interest payments. This will have the effect of increasing the fiscal drag, going against the hopes of the Fed.

FIGURE 2: U.S. GENERAL GOVERNMENT DEBT PROJECTIONS UNDER ALTERNATIVE SCENARIOS - AS A PERCENTAGE OF GDP


To add to all this uncertainty, the situation in the Euro Zone’s periphery is far from stabilized. Following the surprise Cyprus bail-in, international bank regulators have made a push for a democratization of this alternative to outright government bail-outs of banks. This idea is quickly gaining traction amongst central planners. We recently discussed the shortcomings of the BIS’s “Template For Recapitalising Too-Big-To- Fail Banks”.6 The BIS, again in its annual report, reiterated that “we need resolution regimes to make it possible for large, complex institutions to fail in an orderly way.” As uninsured depositors and bank bond holders realize that they do not benefit from government guarantee anymore, bank funding costs will rise and funding might dry up for peripheral European banks.

Conclusion: At the last FOMC meeting, by prematurely announcing the timeline and the specifics of an exit from QE, Bernanke might have lost control of rates and volatility. The current US economic growth is still feeble and hinges on housing, which would be slowed down by raising rates. Banks, while better capitalized than pre-crisis, are still not lending to most borrowers and would be dearly affected by too fast increases in rates. Moreover, European woes still threaten the stability of the international financial system and the recent rush to the exit might further exacerbate funding pressures for weak European banks. Finally, the US government (amongst others) debt load, while already unsustainable, would keep on climbing if rates were to increase only by 100bps.

The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.

1 https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20130619.pdf
2 https://www.stlouisfed.org/newsroom/displayNews.cfm?article=1829
3 https://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5128
4 https://www.bloomberg.com/news/2013-06-27/dudley-says-qe-may-be-prolonge...
5 83rd Annual Report, Bank for International Settlements, Basel, 23 June 2013, pages 4 and 6.
6 We discuss this in the Sprott Thoughts article: “The Dijssel_Bomb”. https://sprottgroup.com/thoughts/articles/the-dijssel-bomb

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  147 Comments

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Galearisancientmoney
Jun 29, 2013 - 4:45pm

Re $50,000.00 gold price (Sinclair) blog cast

It wasn't the price quoted that confused me, it was the USD to 56 on the FOREX that did not compute..

I wonder where he got that from? 82 (present) to 56 is a 68% drop. 1200 to $50000 gold price is about 42 fold increase and would imply a more worthless dollar.

Also note (shamelessly blowing my own horn) that he also stated, as did I, that "the real gold bull market has yet to begin and that the real bull market begins with a cash market for gold at the COMEX".

The thing to watch is the COMEX gold supply draw downs... This inspires another ANOTHER quote: "In the end, gold will be withdrawn for sale". And the bullion banks know the score quite well...

So when Western governments pass the bail-in legislation - how does one buy gold in size anyway?

Anyone else smell a bad odour here?

FWIW,

G.

That_1_Guy
Jun 29, 2013 - 2:31pm

Santa JS on Sprott money.

https://www.youtube.com/watch?v=8Jc5PgmFXeU dont know if it was posted...but here is is. Guy to the beach I go......

tmosleyOddzon
Jun 29, 2013 - 1:50pm

@Oddzon: I'm not trying to

@Oddzon:

I'm not trying to predict what WILL happen, but rather I am trying to think of what CAN happen, and what it means if it DOES happen, in advance, so I am less likely to allow my bias to manipulate my interpretation of past events. This helps to remove bias from the equation.

The question here is not whether or not PMs or anything else or EVERYTHING else are being manipulated. The question is, "are we still business as usual, or is the current system breaking up?" Past observation may incline us to one conclusion or another, but arguing over which reality we live in can be cut short by demanding that predictions be made according to theory. Further, one must understand that just because things don't turn out the way your theory predicted doesn't mean that it is wrong, it only makes it less likely to be right. This will often point us in the direction of the truth, often something that we, or no-one ever thought of before.

Spartacus Rex
Jun 29, 2013 - 12:49pm

@ Nomad

Thank you for the tip on Delamain & Tres Venerable! BTW, did you by chance spot my Stack at the bottom of Lake Annecy? Vive le cognac!

Spartacus Rex
Jun 29, 2013 - 12:35pm

Gold & Silver – Purely A Mental Game Right Now. Do Not Blink.

“Water, water everywhere, nor any drop to drink.”

There is a similar situation with regard to fiat paper everywhere, but not a gold delivery to be made. The delirium cast by central bankers issuing unlimited fiat has kept so many people in a fiat-induced fog, unable to see clearly. The fog has lifted. It is all a game. See the fraudulent scheme for what it is and then fear no more. It is just a matter of time before everything unravels, as it surely is.

The price of gold and silver are closer to a bottom than a top. The QE-Infinity is closer to a top and will collapse under its own “goldless” weight. The PM holders are on the correct side of history. Understand that it has been one of the bigger world scams played by the central bankers, the illuminati who believed themselves untouchable, beyond the scope of comprehension by the non-banking world.

Stop buying into the scheme of the moneychangers. Their time has come, and it is but a matter of time. They are playing with everyone’s mind, doing everything possible to destroy the gold/silver markets, committing self-destruction in the process. They are making every attempt to discredit the barbaric metal that cannot be eaten, that pays no dividends, but somehow survives as the most reliable measure of accepted value.

The moneychangers are dragging the faux decline for as long as they can, hoping to wear down the resolve of PM holders. Ask yourself, are you selling your holdings of either gold or silver has price has declined? Will you sell out if gold goes to $1100, silver to $18? If not, then what difference does the current price of gold of silver make? If you are not going to sell, then let the central bankers crush the price as much as they can!

The paper holders are trapped and desperate to extricate themselves, at greater and greater losses. This is the best gift PM buyers and holders could want. Stackers keep stacking. Back up the truck and keep on loading. This is no longer a game of finesse. It is all about the paper rats and central bankers, [not sure if there is a distinction to be made], caught golden[less] handed, cheating everyone possible who believed in the system. The system is breaking down, collapsing under it own misdoings.

Never lose sight of common sense. Price typically drops due to a lack of demand, an oversupply, or a combination of both. Do you believe there is a lack of demand? [The acknowledged world-wide demand being at its highest.] There surely is no oversupply, yet price is at its lowest in almost three years. Logic tells you how the current forces of supply and demand are dysfunctional. They have been replaced by the false supply forces of central bankers. The longer central planners destabilize the natural forces of the market, the greater the ultimate reaction will be in the opposite direction.

Paper gold has no value, at least to those who own it. Well, maybe they believe it has value, but when the time comes to cash in the chits, the holders of paper gold and silver will have their belief system turned upside down. Everyone knows the paper market dwarfs to physical market, and until the paper market shrinks to a level more on par with the physical, the unwinding of huge paper longs will continue.

In the process, those who value the value of owning and holding physical gold and silver will be justly rewarded. The fiat gold, [like all paper] has to vaporize before the rewards for keeping the faith in the physical will come to pass, and at the much higher prices most have been anticipating. The supply/demand relationship will remain dysfunctional for as long as it takes, and until the paper market collapses. With its collapse will come the proverbial golden phoenix rising from the distorted ashes left behind.

Ques of 10,000 Chinese waiting to buy gold; unabated purchases by China, Russia, India, et al, of whatever is available; mining shortages, cost of production over current prices, and whatever other story or fact one can produce does not matter. The course is set, and nothing will change it. Events will just have to play themselves out, regardless of anyone’s expectations, hopes, or fears. It may take a month, many months, a year, or maybe even longer. No one knows, as has been so apparent for the past few years.

The illuminati are powerful and control all the money in the West, and every dirty trick will be played, count on it. China, Russia, India, Turkey, the Middle East, et al, are no longer buying what the West has been selling…fiat deceit and lies. Exit stage left, West, however long it takes.

The “reality” of the faux paper market is presented next. All the charts say there is no ending action, yet. Time and price are now the enemy of paper, and a gift for the buyers of physical. Stick with your plan. Your time is coming. Almost all want it to be tomorrow, but that will not be. Just remain firm in the belief that it will be. Gold is truth, truth gold, and that is all ye need to know.

[Apologies to Coleridge and Keats.]

Here is what the charts of paper gold and silver are telling us. Charts do not lie, even though they may only be a chart of [paper] lies.

We look for synergy between time frames, but it appears to be changing, as you will see. Wide range bars tend to keep subsequent bars within the high and low of the wide range bar, shown at the top. The second wide range bar, from April 3rd from the right, was also a wide range bar with a close in the middle. The fact that price left that wide range bar so quickly is surprising, and we surmise it reflects the “managing” of price by central banks, unnaturally forcing price lower as fast as possible. We could be wrong, as any guess can be.


We are of the mind that the charts no longer matter, for they reflect an artificial paper supply side with no accounting for the reality of demand for the physical. What we are looking for now are signs of change, and more focus is placed on current developing market activity. As an aside, we threw in an example of how a clustering of closes is the market’s way of sending a message of balance that will lead to imbalance.

The last bar is very interesting. We see it as a subtle sign of possible change. It is explained on the chart, but we need to see more weekly development to confirm or negate our market sense.


We talked about how a wide range bar contains immediate future activity for some time. Here is one on the daily showing this market behavior, and it is presented in contrast to the monthly April bar, viewed as an anomaly. If, in fact, it were from price being forced lower sooner than normal market activity would have taken, we see it as a positive that the central bankers are becoming more visibly desperate.

The comment on the breaking of support on strong volume is made as a future reference for a potential short. We want to point out that the market is the best source of information. Here is one piece of information that is known today that can possibly affect the outcome of a rally into that area at some future point. The point being, there is no need for any guesswork when deciding to buy/sell, if you have the patience to wait for these edge opportunities.

Where the monthly chart showed no sign of ending action, the daily chart is starting to show possible signs of change, change that can take months, [or longer], to turn this market around. The market provides information like pieces to a puzzle, available for everyone to see, if they look.

We go right to the weekly silver chart next because it is showing clearer signs of potential change. That one single bar, the final bar coming at the very end of the month, 2nd Qtr, end of the first half of the year, is a story in itself. It raises three Red Flags, or warning signs, as explained. Another puzzle piece.

We see definite synergy in the silver time frames, and we took note how well silver not only held but rallied, as gold was pushed lower for a part of the early trading day. It has been relatively weaker than gold, but not on Friday.

This is all taking much longer than many expected. One need not be religious to keep the faith, for the reality of owning the physical will not disappoint. The ultimate facts are on the side of PM holders.

By Michael Noonan | June 29, 2013 https://goldsilverworlds.com/price/gold-silver-purely-a-mental-game-right-now-do-not-blink/

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Spartacus Rex
Jun 29, 2013 - 12:21pm
Spartacus Rex
Jun 29, 2013 - 12:16pm

From ZH: Record (Naked) Gold Shorts

The Golden (Sentiment) Rule: If It Isn’t Off The Chart Now, It Soon Will Be Submitted by Tyler Durden on 06/28/2013 19:49 -0400



Remember: what is unsustainable, can never crash, or so those who can create virtually unlimited naked shorts out of thin air would like everyone to believe.

Gross exposure - new all time record shorts:

Net: lowest longs in a decade:

Comex Registered gold inventory: decade lows:

Total Comex gold inventory: lowest since 2008:

Two final ones, but without the charts:

JPMorgan total gold vault holdings: record low.

Bundesbank gold repatriation: ongoing.

Average: 4.894735 Your rating: None Average: 4.9 (38 votes)

https://www.zerohedge.com/news/2013-06-28/golden-sentiment-rule-if-it-isn%E2%80%99t-chart-now-it-will-be-soon

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