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

Fri, Jun 28, 2013 - 9:30am

Hot off the presses, here is the latest from Sprott Asset Management.

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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).


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.


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.

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”.

About the Author

tfmetalsreport [at] gmail [dot] com ()


Jun 28, 2013 - 6:18pm

Ore Grades

Ore grades appear to have gone down in the last 5 years mainly because the price of silver has been high. It's called grade control, and its the primary job of a mining geologist. With higher metal prices, mining companies can profitably process lower grade ore. As metal prices go down, you have to raise your cut off grade to remain profitable. Every mine does it, ore that is below the economical cut off grade at any given time is either left underground or in stock piles at the surface where it can be processed once market conditions improve.

Another factor that has contributed to the appearance that grades have gone down in the last five years is the emergence of number of large bulk tonnage open pit mines such as Penesquito in Mexico. These mines also require high silver prices to operate profitably.

In a nut shell, as the price of silver goes up, grades will always come down, it has nothing to do with a shortage of silver or sentiment that"all the high grade veins have already been mined".

Jun 28, 2013 - 5:47pm

Check this

In Poland one can sell old Russian gold coins (Ruble) to a dealer for over 200% of the spot price.

Jun 28, 2013 - 5:41pm

OC15 Posts top notch information and views here regular. Search for mining cost related material on his site.

So It Goes
Jun 28, 2013 - 5:37pm

Interesting Tulving Chart

Nice review from Sprott.

Here's some thing interesting from Tulving:

2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles - Brand New Coins

500 Coin Minimum

(1 Sealed Box)

We Buy @ Spot + $2.10


Spot + $2.99

2013 Sealed Mint Boxes Of 1 Oz. Silver Canadian Mapleleaf - Brand New Coins

All Mint Boxes Shipped Free Overnight In Our Custom Made Shipping Boxes

500 Coin Minimum

We Buy @ Spot + $1.80


Spot + $2.79

2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles "San Francisco Mint"

Brand New Coins

500 Coin Minimum

(1 Sealed Box)

We Buy @ Spot + $2.30


Spot + $3.29

2013 Mexican Libertad 1 Oz .999 Silver Coin - Brand New Coins

In Original Mint Boxes Of 500

500 Coin Minimum

We Buy @ Spot + $2.00


Spot + $3.29

2011 Sealed Mint Boxes Of 1 Oz. Silver American Eagles "San Francisco Mint"

Brand New Coins

500 Coin Minimum

(1 Sealed Box)

We Buy @ Spot + $2.50


Spot + $4.49

They are all current year sealed 500 oz monster boxes, 2013, 1 Oz guaranteed by a sovereign country, silver. Look at the premiums.

Canadian Maple Leaf - $2.79.

US Eagle - $2.99

Mexican Libertad - $3.29

Why in the world would the generic Mexican Libertad have a higher premium than the generic ASE? Are Mexicans soaking up the normal production of the national mint and decreasing exports, or is the Mexican National Mint more incompetent than the US Mint and cannot meet demand?

Carlos Slim - are you there? Got an answer for us?

So it goes.

Dyna mo hum
Jun 28, 2013 - 5:32pm
Jun 28, 2013 - 5:29pm


Just wanted to give a heartfelt thank you to Mad5Hatter for hooking me up with some beautiful new shiny! As promised, brand new without a fingerprint!

Thank you!

Spartacus Rex
Jun 28, 2013 - 5:27pm

Gold and Silver Disaggregated COT Report (DCOT) for June 28

OUSTON -- This week’s Commodity Futures Trading Commission (CFTC) disaggregated commitments of traders (DCOT) report was released at 15:30 ET Friday. Our recap of the changes in weekly positioning by the disaggregated trader classes, as compiled by the CFTC, is just below. This week we are also adding in the net positioning of traders the CFTC classes as “Commercial” in the Legacy COT report.

(DCOT Table for June 28 and Legacy COT commercial positioning for data as of the close on Tuesday, June 25. Source CFTC for COT data, Cash Market for gold and silver.) (More...)

In the DCOT table above a net short position shows as a negative figure in red. A net long position shows in black. In the Change column, a negative number indicates either an increase to an existing net short position or a reduction of a net long position. A black figure in the Change column indicates an increase to an existing long position or a reduction of an existing net short position. The way to think of it is that black figures in the Change column are traders getting “longer” and red figures are traders getting less long or shorter.

All of the trader’s positions are calculated net of spreading contracts as of the Tuesday disaggregated COT report.

We also focus on the Legacy COT positioning of traders deemed “Commercial” by the CFTC, which includes Producers, Merchants, Processors and Users, plus Swap Dealers in a single category. The Legacy COT report preceded the Disaggregated COT report and we have tracked and charted it for many years, focusing on the movement and positioning of commercial traders – The “Big Hedgers.”

Spartacus Rex
Jun 28, 2013 - 5:21pm

'Silver Is Such a Bargain Now It Is Hard To Ignore It' by D.S.

I recently had a conversation with a friend who works for Sprott. We were discussing the state of the precious metals market. He told me that people have asked Eric Sprott (Sprott Asset Management) why he didn’t place an order for a billion or more and stand for delivery of physical gold? The reason he doesn’t is because it is written in the contracts that they can fill the order with shares of GLD. There would NOT be a force majeure. What a racket! The leveraged paper game is so foul and rigged that the only game in town is physical metals.

Gold (and silver) is a market that moves up and down in a saw-tooth pattern and currently we are still in the down mode. 50% corrections are not uncommon (see the 1970s bull market), but we are very close to the bottom before it turns up again, and it will.

My friend Trader David R emailed me today and feels that Bernanke is doing everything he can to make sure things don’t fall apart on his watch. He can’t stop QE, but he can jaw bone about it. David feels that gold could drop into the mid $1,100s and silver could touch the $16 area. Well, if that comes to pass, so be it and I will be loading up the truck to buy all I can afford, in addition to everything I currently own. I still prefer gold and silver to dollars and the fact that their paper price has tumbled is of no long-term consequence to me.

Silver is getting to be such a bargain that it is hard to ignore it. Ted Butler points out that it only takes, at the current price, less than $200 million/month to absorb all the new silver entering the market. Meanwhile, it takes around $6 billion/month to buy the new gold entering the market each month. Butler says:

The entire 1 billion oz of silver bullion in the world is now worth less than $20 billion, while the entire world’s 5 billion oz of gold is still worth a proportionately much larger $6 trillion.


Butler Research

That is why he greatly favors silver over gold, especially at these prices. The silver/gold ratio is now 66 to 1! It could drop by one-third (silver outperforming gold by that amount) and still be at the upper end of the normal range.

Meanwhile, the economy and the middle class are hurting. As Richard Russell puts it:

Twenty-three million Americans have no jobs, forty-eight million are living on food stamps, our national debt is off the charts, the US government has lost its triple-A rating, and we are approaching a debt ceiling that threatens to close down the government. Inflation or depression, and how you can profit either way.

The fact is that investing today has become a guessing game called “What will the Fed do next — and when?” In the meantime, Bernanke talks and various Fed members are hinting that “Bernanke talks too damn much.


Dow Theory Letters, June 26, 2013 Author : David Schectman
Published: June 28th, 2013

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Key Economic Events Week of 10/19

10/19 11:45 ET Goon Chlamydia
10/20 8:30 ET Housing Starts
10/20 1:00 pm ET Goon Evans
10/21 10:00 ET Goon Mester
10/21 2:00 pm ET Fed Beige Book
10/22 8:30 ET Initial Jobless Claims
10/23 9:45 ET Markit Oct flash PMIs

Key Economic Events Week of 10/12

10/13 8:30 ET CPI and Core CPI
10/14 8:30 ET PPI
10/14 9:00 ET Goon Chlamydia
10/15 8:30 ET Philly Fed
10/15 8:30 ET Empire State Idx
10/15 8:30 ET Import Price Idx
10/16 8:30 ET Retail Sales
10/16 9:15 ET Cap Ute & Ind Prod
10/16 10:00 ET Business Inv

Key Economic Events Week of 10/5

10/5 9:45 ET Markit Svc PMI
10/5 10:00 ET ISM Svc PMI
10/5 10:45 ET Goon Evans
10/6 8:30 ET Trade Deficit
10/6 10:00 ET JOLTS job openings
10/6 10:45 ET Chief Goon Powell
10/7 2:00 ET Sept FOMC minutes
10/7 3:00 ET Goon Williams
10/8 8:30 ET Initial jobless claims
10/9 10:00 ET Wholesale Inventories
10/9 12:10 ET Goon Rosengren

Key Economic Events Week of 9/28

9/29 8:30 ET Advance trade in goods
9/29 9:00 ET Case-Shiller home prices
9/29 10:00 ET Consumer Confidence
9/30 8:15 ET ADP employment report
9/30 9:45 ET Chicago PMI
10/1 8:30 ET Personal Income and Spending
10/1 8:30 ET Core Inflation
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/2 8:30 ET BLSBS
10/2 10:00 ET Factory Orders

Key Economic Events Week of 9/21

9/21 8:00 ET Goon Kaplan
9/21 10:00 ET Goon Evans
9/21 Noon ET Goon Brainard
9/21 6:00 pm ET Goon Williams & Goon Bostic
9/22 10:30 ET Chief Goon Powell on Capitol Hill
9/22 Noon ET Goon Barkin
9/22 3:00 pm ET Goon Bostic again
9/23 9:00 ET Goon Mester
9/23 9:45 ET Markit flash PMIs for September
9/23 10:00 ET Chief Goon Powell on Capitol Hill
9/23 11:00 ET Goon Evans again
9/23 Noon ET Goon Rosengren
9/24 1:00 pm ET Goon Bostic #3
9/24 2:00 pm ET Goon Quarles
9/24 10:00 ET Chief Goon Powell on Capitol Hill
9/24 Noon ET Goon Bullard
9/24 1:00 pm ET Goon Barkin again & Goon Evans #3
9/24 2:00 pm ET Goon Bostic #4
9/25 8:30 ET Durable Goods
9/25 11:00 ET Goon Evans #4
9/25 3:00 pm ET Goon Williams again

Key Economic Events Week of 9/14

9/15 8:30 ET Empire State and Import Price Idx
9/15 9:15 ET Cap Ute and Ind Prod
9/16 8:30 ET Retail Sales
9/16 10:00 ET Business Inventories
9/16 2:00 ET FOMC Fedlines
9/16 2:30 ET Powell Presser
9/17 8:30 ET Philly Fed
9/18 8:30 ET Current Acct Deficit

Key Economic Events Week of 9/7

9/9 10:00 ET JOLTS job openings
9/10 8:30 ET Initial jobless claims
9/10 8:30 ET PPI
9/10 10:00 ET Wholesale Inventories
9/11 8:30 ET CPI
9/11 9:45 ET Core CPI

Key Economic Events Week of 8/31

9/1 9:45 ET Markit Manu Index
9/1 10:00 ET ISM Manu Index
9/1 10:00 ET Construction Spending
9/2 8:15 ET ADP employment
9/2 10:00 ET Goon Williams
9/2 10:00 ET Factory Orders
9/3 8:30 ET Initial jobless claims
9/3 8:30 ET Trade Deficit
9/3 12:30 ET Goon Evans
9/4 8:30 ET BLSBS

Key Economic Events Week of 8/24

8/24 8:30 ET Chicago Fed Idx
8/25 10:00 ET Consumer Confidence
8/26 8:30 ET Durable Goods
8/27 8:30 ET Q2 GDP 2nd guess
8/27 9:10 ET Chief Goon Powell Jackson Hole
8/28 8:30 ET Pers Inc and Consumer Spend
8/28 8:30 ET Core Inflation
8/28 9:45 ET Chicago PMI

Key Economic Events Week of 8/17

8/17 8:30 ET Empire State Manu Idx
8/17 Noon ET Goon Bostic
8/18 8:30 ET Housing Starts
8/19 2:00 pm ET July FOMC minutes
8/20 8:30 ET Jobless claims
8/20 8:30 ET Philly Fed
8/20 10:00 ET LEIII
8/21 9:45 ET Markit flash PMIs July

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