David Schectman

Smart Money Knows Where This Is Headed

November 7, 2014

I fear that all the talk of deflation and the falling price of commodities, even gold and silver, are leading people to the wrong conclusions.

In the last couple of years, I hired the two best writers I could find - Andy Hoffman and Bill Holter - to present Miles Franklin's views to you. Heck, I'll be 73 in four months and I figured it's time to slow down a bit and hand over most of the writing to the "young" guys.

But things are now getting so out of hand, I think it's appropriate that I give you my own take on what's happening. Let me put it this way - Things are really spiraling out of control.

This recent mid-term election offers all the proof you need to see that most Americans are fed up with the way things are headed. They may not know the reality of it (as hopefully you do), but they know things are not headed in the right direction. So we threw out a few Democrats and replaced them with a few Republicans and everything will be all right now - NOT.

On a financial level, I know to many of you, it is confusing and discouraging to. In spite of what I have written for years, many of you still look at your gold and silver as an investment, when in fact they are an insurance policy and they are real, solid forms of money. You bought gold, silver and platinum because we told you it was the thing to do. And now, with prices falling and talk of $700 gold and $8 silver and deflation, doubt is starting to creep into your thoughts. Stop it right now. Things are NOT what they appear to be. The smart money is not selling; they are buying - buying physical gold and silver. In fact the demand is so great, the US Mint and the Canadian Mint are running out of product to sell. That should tell you all you need to know. The smart money knows where this is headed. The average man in the street will be the last to figure it out, and by then, it will be too late.

You are going to have to take a stand here. It's not easy. There isn't any middle ground. You will be either right or wrong, but you still will have to make a choice. All of us at Miles Franklin have made ours, long ago, and we are not wavering. I have written about the inflation/deflation debate for the last 10-years. Nothing I see over the last decade has changed my mind. The central banks will not, cannot allow deflation to take hold because of the massive amount of debt and leverage in the markets, especially the bond markets. The central banks will have to keep on creating money out of thin air to purchase bonds because rising interest rates will sink everything. All the central banks will have to follow the Japanese model or else their currencies will become too strong and it will choke off their economies. The Swiss franc has to follow the euro, to be competitive in their exports. Korea and China will have to follow Japan, to be competitive with their exports. We are not immune to this either. If we allow the dollar to get too strong (relative to the other junk currencies out there) our export-based industries will wither and die. There is no winning this anymore. Buying a little more time (maybe very little now) is the only strategy they all have.

I just received a copy of the SFG Weekly from a friend. I am re-printing it for you to read right here, in my section of the newsletter. It is too important to drop it down to the Featured Articles section that I always put together for you. It belongs here, in the beginning, where most of you will read it. It is very important that you read, and understand what Savage is saying. But before I present it to you, I have a few things I want to say about it.

I fear that all the talk of deflation and the falling price of commodities, even gold and silver, are leading people to the wrong conclusions.  Many of our readers now fear deflation when their real fear should be total debasement of (all) fiat currencies.  John Williams and Jim Sinclair get it.  But they are the "old-timers" and their credibility is on the wane with many people now - because their warnings came too early.  Inflation does not have to accompany a strong economy. In fact a weak economy will lead to more printing and debasement of the dollar, leading to rising prices (especially commodities).

First comes the inflation, then the deflation (or Depression). Think of Germany in the 1920s, with the Weimar hyperinflation, followed by the Great Depression. Japan of 2014 is Germany of 1921.

I have never believed that deflation here is possible.  The minute it starts to show up in the data - falling stock market, falling real estate market, rising unemployment, sinking economy, etc. - the Fed will do exactly what Japan is doing now. This is a major fake-out. Richard Russell is right.  "Inflate or die." Perhaps you should read Jim Rickards The Death Of Money.   It will be on a global event.  He's talking about a currency war or competitive devaluations.  This will not end well - and if Savage's Weimar analogy is even remotely correct, WWIII can't be that far off just as the German hyperinflation sowed the seeds of WWII. But this time many of the participants have nuclear weapons.

John Mauldin discussed Japan's inflation recently.  But as far as I know, and I have followed him for over 10 years, he has never had much use for gold. His current take on the Japanese debasement is the dollar will rise and rise as the yen and other currencies self-destruct.  He is pro-dollar (and therefore anti-gold) I don't believe this will happen because if the Fed stops printing, our economy, stock market and real estate market will be toast.

I was curious to see what my friend Bill Fleckenstein had to say about some of these topics, so I sent him an email on Thursday. His perspective (as a hedge fund guy) is a bit different from the usual suspects I know in our industry. So I sent him the following Email.

Bill,

I have a couple of questions for you.

The common view now is that the dollar will continue to strengthen, well into the future (even though many admit it's just the best of a bad lot of fiat currencies).  Do you agree (I would think not)?

There are many "experts" now who feel that deflation is the main threat.  To me the real issue is will the Fed allow it?  Japan certainly has pulled out all the stops.  Will Yellen follow Greenspan and Bernanke or will she allow everything to cater?  (I think not, and then, the deflation quickly turns into serious inflation.)  What do you think?

There are some writers who expect gold to drop to $800, or even $600, and they claim the bull market is over.  Do you agree?  (I would think not.)

I value your views.  Any comments?

Best of everything,

David

He replied:

The dollar could flame out at any time; it's all hype.

No deflation is possible until after the printing press is taken away.

I think gold will dig in around here somewhere, but I have been dead wrong so far.

Hope that helps.

Bill.

I guess we are all on the same page here, and he is not your typical "Goldbug."

(It's hard to accumulate precious metals now, as they continue to fall, but it has never been more necessary. Tick, Tock, time is running out.  Gold and silver are not only the buy of our lifetime, but they will prove to be our best life preserver. Hang in there. Do not sell your gold and silver! Your time to be able to purchase physical metals, on the cheap, for your dollars is running out. Here is a piece from Mike Savage with Savage Financial Group:

Desperate Japan - www.raymondjames.com/savagefinancial/home

I have been fielding a few calls over the last few days from people who are surprised that Japan increased the size of their QE ("printing" up money and buying stocks and bonds with the newly issued cash) just 48 hours after the Federal Reserve in the United States finished its latest version.

The major sentiment that I am hearing is that this could go on forever and that after Japan is tapped out the EU will take over, etc.

I would like to take a moment and give you my take on this. This move makes it perfectly clear that the world economy is addicted to the money "printing" and stock and bond markets would go into a swan dive without this support. This action appears to me to be the most desperate move that I have ever seen a central bank make. It appears to me that when central banks are willing to throw their citizens under the bus with increasing prices across the board without a corresponding increase in wages and issue new massive amounts of debt to pay off interest and current bills we are closer to a cliff than a launch pad.

Randall Forsythe, editor at Barrons put it this way "This is a truly dazzling example of 21^st century government finance. The government runs a deficit covered by IOUs, or bond borrowings. The central bank buys those bonds to fund the budget shortfall and also purchase bonds sold by the pension plan, all reserves it creates out of thin air. The pension fund uses the newly printed yen it receives from the BOJ for its bonds to buy claims against the future earnings of private industry- that is common stocks."

If you think I may be exaggerating the Japanese Central Bank has increased its QE 30% to 750 billion dollars per year. Just to give you an idea of how massive that is, if we in the United States had QE based upon the size of our GDP it would be like "printing" $2.5 TRILLION dollars per year. This comes at a time when Japan's Debt to GDP is a massive 250% and is over 600% if you include business, household and financial sector debt. (David Stockman) It is now set to explode higher along with most import prices and necessities of life.

When you consider that Japan has few natural resources of their own and import most of their food and energy the declining value of the yen (which is what they want) will likely increase living expenses and put a major dent in the standard of living of most of the Japanese.

Japan had a 22-year head start in their deflationary environment. Unfortunately, it doesn't appear that our central bank has learned the lessons that Japan should have taught. Over the past 25 years the Japanese have had massive infrastructure projects, money "printing", debt monetization (buying bonds that nobody else will buy because the yield is not sufficient for the risk), and many financial games to make it look like progress was being made.

What do they have to show for all of this? Massive debts that can obviously not be paid unless the Yen is devalued a LOT more. They have an economy that is crippled because of the massive debt and no growth to make it easier to pay. It appears that the Bank of Japan is not only the buyer of last resort for Japanese government bonds but the buyer of ONLY resort.

Who in their right mind would buy a bond that is paying less than �% when the central bank is assuring you that you will have at least 2% inflation?

In addition, they have made it known that they will be reallocating their largest pension fund to increase stock exposure to 48% (24% Japan, 24% other). This leaves nothing to the imagination. The Japanese Central bank along with most other central banks are rigging the markets for their own benefit. They are now active in all markets and there is no way to deny that if they ever wanted to.

Based upon the action in the markets for the week ending October 31, it appears that the short-term boost that was wanted was played out to near perfection. However, the seeds of ultimate destruction have been sown and they are visible right now.

I fail to see any difference between what the Japanese are doing to their currency and what Weimar Germany did to their currency in the 1920s. It was at that time that the Mark traded from 4 marks to the dollar to over a trillion marks for a dollar just a few years later. People used wheelbarrows to carry the cash to get a loaf of bread. Thankfully, we have credit cards and ApplePay today so they won't need wheelbarrows- just a lot of zeros to count!   

This phenomenon, which happened in Germany, did not happen all at once. There were signs, many like we are seeing today. Then, all at once- bang! It hit critical mass and could not be stopped until the currency was destroyed. Anyone who thinks these central banks have this under control- think again. It was the German central bank that caused the Weimar hyperinflation. This episode is the main reason that the Bundesbank (German Central Bank) will not allow European QE, at least so far.

It is the Japanese Central bank that appears hell bent on decreasing the value of the Yen. They should be careful what they wish for.

Wealthy people around the world have already started to divest of paper assets. They are trading paper for fine art, automobiles, real estate, enduring businesses, and metals.

In the meantime, oil and commodities are selling off which seems to indicate that           economic activity is slowing and appears to have no end in sight for that trend. So as the stock market continues its rise to new heights the underlying economy is becoming more and more anemic. This should not be any surprise as all of this new debt that is being created to pay off new debt and interest on previously issued debt is exactly what is choking off lending for productive use- like infrastructure, new companies and jobs.

It is too bad that most people are brainwashed by the propaganda on mainstream TV and think that all of this is normal. It is not!  The one thing that is different this time is that in the past there would be a country or two that would debase their currency and pay the price. Today, the whole world is in on it. I am not looking forward to when this comes to a head!

While many may look at this as gloom and doom I look at this as reality. I also look at it as an opportunity. It will only be an opportunity if you have a plan to take advantage of it.

Be Prepared!

Mike Savage, ChFC Financial Advisor

2642 Route 940 Pocono Summit, Pa 18346

___________________ 

Today's Featured Articles

Ed Steer (I know all silver investors are struggling with reconciling the reality of the historic decline and why it's occurring.) (Make no mistake - these are historic times for silver and gold.)

King World News (The Bank of Japan, smarting from years of deflation, decided to unveil some "shock and awe." The Bank of Japan stunned the markets by saying that it would boost asset)

LeMetropole Caf� (...It means we are presently underwater here in Price Terms, arguably presenting us with the �€˜Mother of all Entry Points!)

Jim Sinclair (The mid-term elections are behind us and it appears the political landscape in America is changing. But how much is really changed?)

Silver Shortages Confirm Cartel Lunacy

November 6, 2014

It's official! Never before have markets been more manipulated; and never before, the perpetrators more brazen - or clumsy - in such world-destroying machinations. To wit, today's "powers that be" have taken hubris to new heights in overtly rubbing the "99%'s" nose; as Bank of Canada Governor Stephen Poloz did yesterday, self-righteously pontificating that "adult children stuck in their parents' basements should take unpaid work as they wait for the recovery to take hold'. In other words, become slaves - or perhaps, serfs. Sadly, such callousness doesn't hold a candle to that of Dallas Federal Reserve President Richard Fisher, who on Monday, averred "QE3 was a gift to the rich."

Then again, we are unquestionably at a crossroads in world history - certainly monetarily; and potentially, from a far broader geopolitical sense. Empires are rising and falling, economies crumbling, and "leadership" across the board becoming more draconian. In Japan, the government is daring hyperinflation to emerge from the "deflationary" shadows; whilst in Europe, the continent's short-lived monetary union is threatening to tear apart - perhaps, permanently. States and nations alike are threatening to secede; in many cases, as the aforementioned economic deterioration yields political extremism. Meanwhile, here in the Oblivious States of America, people continue to vote for the same bought-and-paid for Democrats and Republicans that have brought the nation to its knees.

Most likely, Europe will provide at least one major economic and/or geopolitical flashpoint - as decades of socialism and 15 years of a destructive, ill-begotten monetary union are on the verge of blowing the continent apart. In Italy, the "Five Star Movement" is challenging decades of traditional leadership; as is the "We Can" party in Spain, and the ominous, neo-Nazi "Golden Dawn" party in Greece. The nation of Scotland came close to seceding from the UK last month, and Venice, Italy unanimously wants to become its own nation.

As for Catalonia - which contributes 25% of Spain's tax revenues - Sunday's secession referendum could have major ripple effect across the continent. Sure, the corrupt Rajoy government had it ruled "unconstitutional"; but tell that to millions of angry Catalonians, who desperately want to secede from the dying Spanish state - and likely, will let it be known, loud and clear. And "last but most" is the November 30^th Swiss referendum, which unquestionably is the principal reason, "end of QE" and mid-term elections aside, for this month's historic Cartel paper gold and silver raids. Or as we more aptly deem them "Cartel Suicide."

Clearly, the Cartel's maniacal focus has been on pushing gold down - assuming the world's most financially literate population will "take the bait" and vote "no." However, such short-sightedness entirely ignores the more momentous issue of the simultaneous Swiss Franc plunge due to the machinations of the ECB, which by "hell or high water" intends to debase the very Euro currency the Franc is pegged to. Maintaining this insane linkage has cost the Swiss National Bank hundreds of millions of (printed) Francs; and trust us, the Swiss people are watching this relationship at least as much as the gold price. Heck, as I write Thursday morning, the ECB press conference is ongoing; during which, the Euro plunged to a new two-year low, after "whatever it takes" Draghi said, "the main message is ECB assets are set to expand as others contract" and "ABS (asset-backed security, i.e., mortgage bonds) buying is to begin shortly." And frankly, such a statement is not only astronomically dovish; but clearly, a significantly salvo in the "final currency war" - specifically targeted at the U.S. dollar, although clearly, the Fed's "end of QE" doesn't involve contraction of its balance sheet; but instead, a mere cessation of overt expansion.

And thus, it shouldn't have surprised anyone when on Friday afternoon, the U.S. Mint reported Silver Eagle sales were higher in October than all but two months in its history; in both cases in January, when sales are typically elevated due to year-end shutdowns in mid-December. Note bene, as you see below, the fourth and fifth biggest sales months were also in 2014.

That said, October's demand surge was nothing compared to the first 2� days of November in which more than three million Silver Eagles were sold, before the Mint informed the public

at roughly 1:00 PM EST that it was suspending sales on account of being sold out of silver. This is the third time the Mint has officially sold out in five years; and the fifth time when, though not officially sold out, rationing became so extreme that premiums and delivery times surged. FYI, the Royal Canadian Mint - which only discloses sales figures quarterly (with a two-month lag), has been rationing silver since September; and naturally, silver Eagles, Maples, and "junk" premiums and delivery times have risen anew.

 

 

 

Amazingly, demonstrating just how "hubristic" TPTB have become, the Cartel actually attacked just as this wildly bullish announcement emerged, pushing silver prices down a whopping 2% in the day's final hours, whilst not a single other market (other than mining stocks, which were bombed) significantly moved. Sitting with my savings in physical metal, I could not be more comfortable - as clearly, the "chinks" in the suppression scheme's armor are becoming gaping holes.

 

 

And one more, non-sequitur note, as we head into tomorrow's first post-election NFP report; which based on the tenor of most economic data, as well as the Obama Administration's likely goal of starting the "new Republican Era" weakly, I wouldn't be in the slightest surprised to see "weaker than expected" data, even with an average October "birth-death" addition of nearly 160,000 jobs. Which is the continuing dichotomy of "weekly jobless claims" remaining near record lows, simultaneous with new lows in the labor participation rate, energy consumption, and all other manner of real economic data. Not to mention, this morning's simultaneous release of the Challenger Job Cuts report - depicting the biggest monthly surge in layoffs in three years and the worst October in five years.

As we have discussed ad nauseum, the "system" comprehensively broke in 2008; and since then, whatever economic data that's even true demonstrates a horribly distorted reality of labor hoarding and secular shifts dominated by part-time work (that doesn't qualify for unemployment benefits); exploding "other" entitlements (that substitute for unemployment benefits); and of course, the handful of "hold-outs" that still believe the mythical "recovery" - that has yet, has decidedly NOT shown itself - is right around the corner. Already, even most "island of lies" data is rolling over; and as for the "core" of the American economy - retail; it has, for all intents and purposes, not been this bad since the bottom in 2008. My trips to a nearly deserted Best Buy last weekend - which used to be jam packed - spoke volumes as to the true state of the economy, and the direction even massively distorted "jobless claims" data must ultimately trend.

On his weekly podcast, Andy Hoffman discusses the stock and bond market, Labor Participation Rate, collapsing oil prices, last week's GDP report, the U.S. dollar, Swiss gold referendum and U.S. Mint Silver Eagle sales.  To listen to the audio, please click below.

The Silver Flashpoint

American Eagle Silver Coins Sold Out as Demand Soars - www.caseyresearch.com

November 6, 2014

By Ed Steer

The Wrap

Make no mistake - these are historic times for silver and gold. Tired of drawing imaginary price points from which I believe silver can't possibly go any lower, instead I can only focus on the reason for the decline and knowing that whatever the low price print may be, it will be a number many will remember for a long time to come. I know all silver investors are struggling with reconciling the reality of the historic decline and why it's occurring. For me, the reasons still seem clear, although the extent of this decline was not fully expected. (Although I think I may have written in the distant past about there being a mother of all silver sell-offs arranged by the commercials in which they got every speculator to sell out or go short as was possible, right before the big price blast-off). Truth is, with the record technical fund short position already in place, I thought we had seen the big sell-off. Then again, such a sell-off, by definition, would need to exceed preconceived extremes. - Silver analyst Ted Butler : 05 November 2014

Just when you thought it was safe to come up for air, JPMorgan et al and their HFT buddies showed up in the thinly-traded Far East market at 1:30 p.m. Hong Kong time on their Wednesday afternoon---and spun their algorithms once again.

After the events of the last four or five days in particular---and the last couple of months in general---I won't hazard a guess as to where we go from here in the short term, either up or down.  But the stars are most favorably aligned for a melt-up in all commodities, led by the precious metals---along with a corresponding meltdown in the U.S. dollar.

But whether the powers-that-be will allow it to happen is still the $64,000 question.  It seems like they've gone to a lot of effort to get to the position that we're in today---and I find it hard to believe that they would vigorously cap the inevitable rallies in the same fashion that they've been doing for the last twenty-five or so years.

We'll just have to wait some more---and be on the lookout for their next move.

Yesterday In Gold & Silver

It was another big sales day over at the U.S. Mint.  They sold 12,000 troy ounces of gold eagles---2,000 one-ounce 24K gold buffaloes---and another 635, 000 silver eagles.

In the last four business days, the U.S Mint has sold 2,685,000 silver eagles, about twenty times their daily production rate---and I know for a fact that little of this was sales involving the demand from the general public. 

Critical Reads

American Eagle Silver Coins Sold Out as Demand Soars

The U.S. Mint ran out of American Eagle silver coins after selling 1.26 million ounces since the start of the month as futures in New York slumped to the lowest in more than four years.

"Due to the tremendous demand we have experienced in the last several weeks, the U.S. Mint has temporarily sold out," Michael White, a spokesman, said in an e-mail yesterday. The Royal Canadian Mint also said demand was up "significantly."

In October, U.S. Mint sales jumped 40 percent to 5.79 million ounces from a month earlier to the highest since the record in January 2013. Futures dropped 0.5 percent to $15.365 an ounce on the Comex at 9:30 a.m. in Singapore today after tumbling to $15.12 yesterday, the lowest since February 2010.

"Recently, demand for our products has picked up significantly, and supply continues to be allocated to our global network of distributors," Chris Carkner, a managing director at the Royal Canadian Mint, said in an e-mail Nov. 4. "We currently continue to produce and take orders for 2014 coins with no anticipated stoppage in shipments."

When you click on the link, you'll note that the 'thought police' over at Bloomberg changed the headline from "demand soars" to "demand jumps."  This short article, filed from New York, appeared on their website at 6:47 p.m. Denver time yesterday evening---and I thank Ken Hurt for digging it up for us.  There was also a similar piece from Reuters.  It was headlined "U.S. Mint temporarily sold out of silver eagles amid huge demand".  I found that item over at the gata.org Internet site.

Read more...

Richard Russell Warns We Will See Violent Action Ahead - www.kingworldnews.com

November 4, 2014

One central bank giveth and another central bank taketh away. The Bank of Japan, smarting from years of deflation, decided to unveil some "shock and awe." The Bank of Japan stunned the markets by saying that it would boost asset purchases. Barron's brilliant editor, Randall Forsythe, put it this way:

This is truly a dazzling example of 21st century government finance. The government runs a deficit covered by IOUs, or bond borrowings. The Central Bank buys those bonds to fund the budget shortfall and also purchases bonds sold by the pension plan, all reserves it creates out of thin air. The pension fund uses the newly printed yen it receives from the BOJ for its bonds to buy claims against the future earnings of private industry -- that is, common stocks.

In other words, the central bank monetizes the debt with money created out of thin air. The old adage tells us, "There's no free lunch." This is also true when applied to real money, which is gold. Gold cannot be created by computer entry. It takes capital, long years of searching and mining expenses to recover gold from the ground. Thus gold, or real money, costs men's labor, risk and capital. Yet fiat money, created from the computer, is, in effect, "free lunch" money.

At one time the dollar was freely convertible to gold. But over the years the US went off the gold standard, meaning that the dollar was no longer convertible to gold. Whereas the pre-1930 dollar implied that the holders of dollars actually owned a certain portion of gold, with the advent of fiat money, the dollar began saying, "I owe you nothing." Thus, as I see it, fiat money is immoral in that no risk or capital was exerted to produce the fiat money. Fiat money is, in truth, "free lunch" money. No man-hours or risk are represented by fiat money.

Because of Japan's shocking move to increase quantitative easing, traders dumped commodities, including the precious metals. Silver and gold sagged while stocks around the world boomed.

As I write, half an hour before today's close, Industrials and Transports are both lower. This is surprising, since the market ended Friday's session with exciting upside momentum. With half an hour to go, I'll see how the market closes. The big picture today is the world's central banks battling against deflation. The Bank of Japan is going all-out against deflation and in the process creating additional billions of yen. The world's safe haven at this time appears to be the US dollar. Money from all over the globe is pouring into the US dollar. As the dollar firms, the dollar cost of gold declines. Thus the dollar price of gold is a function of dollar strength or weakness (gold is priced around the world in dollars). With the Fed keeping short rates at zero (ZIRP), I expect an eventual collapse of the dollar.

Continue reading on King World News.com.

__________________________

11/6 HUI Surges (Early Anyway) - www.lemetropolecafe.com

 

Bill,

 

I think it's safe to say now that the Comex silver situation is as about as explosive as it can get. The shorts and the longs are all in. With near-record open interest (a staggering 875 million ounces) somebody is facing the financial abyss. There is no way out for one of the two sides squaring off. It's painfully obvious that it should be the shorts who are hopelessly trapped. Their potential losses are nothing short of catastrophic in light of the HUGE surge in physical demand. If the shorts somehow extricate themselves from this situation with profits intact we will know beyond any doubt that COT is a sham. If the mining industry had any gumption they would announce industry-wide curtailments immediately. Cutting production at $15 silver would be a death sentence for Comex shorts already feeling trapped. The mining industry has the keys to drive the $200 silver bus yet they willfully choose to let the cartel dictate their demise.

 

It's amazing how few Comex contracts it often takes for the cartel to muscle silver lower on the nightly access open. The first 3 minutes of last evening's open featured a measly 34, 31, and 19 contracts traded. The algos must know what the bid stack is at all times, and need only apply the minimum, amount of pressure to make it open lower. I'm positive though that if a 1,000 lot bid hit the silver open there would be a 1,100 lot offer to take it out, and silver would still open lower.

 

Of course we have NFP Friday tomorrow, with all of the 90% probabilities that go with it. Recent government data releases imply a continuation of the happy face mode of MOPE. Recent cartel action also implies an attack no matter what the report (allegedly) indicates. The RSI mired in single digits and hugely oversold conditions in general suggest at a minimum some form of relief rally next week. With the lawless and feckless nature of the recent attack on gold however guarantees are a fool's game. In the meantime we wait for any sign that Comex silver shorts are any closer to annihilation.

James Mc

 

*Some constructive notes from ZeroHedge...

 

Physical Gold Shortage Worst In Over A Decade: GOFO Most Negative Since 2001

 

Submitted by Tyler Durden on 11/06/2014 09:37 -0500

 

The last time there was an systemic physical gold shortage was in July 2013. It is then that, for the first time in 5 years, the 1-month Gold forward offered rate, or GOFO, went negative. We said:

 

Today, something happened that has not happened since the Lehman collapse: the 1 Month Gold Forward Offered (GOFO) rate turned negative, from 0.015% to -0.065%, for the first time in nearly 5 years, or technically since just after the Lehman bankruptcy precipitated AIG bailout in November 2011. And if one looks at the 3 Month GOFO, which also turned shockingly negative overnight from 0.05% to -0.03%, one has to go back all the way to the 1999 Washington Agreement on gold, to find the last time that particular GOFO rate was negative.

  

Zero Hedge

Fast forward to today, when as noted over the past week there has been a massive shortage of precious metals - most notably silver which as of this moment is indefinitely unavailable at the US Mint - as a result of the tumble in the paper price, and following 8 days of sliding and negative 1 month GOFO rates, today the physical metal shortage surged, as can be seen by not only the first negative 6 month GOFO rate since last summer's much publicized gold shortage when China was gobbling up every piece of shiny yellow rock available for sale, but a 1 month GOFO of -0.1850%: the most negative it has been since 2001!

 

Zero Hedge

 

Said otherwise, the physical shortage is the worst it has been in over a decade, even as the price of paper gold continues to drop!

 

And for those for whom the topic of GOFO inversion is new, here is how we described the situation last time:

 

* * *

 

What is GOFO (Gold Forward Offered Rates)?

 

GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods.

 

Who provides the rates?

 

The contributors are the Market Making Members of the LBMA: The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Soci�t� G�n�rale and UBS AG.

 

When are the rates quoted?

 

The means are set at 11 am London time. These are the rates shown on the LBMA website. To show derived gold lease rates, the GOFO means are subtracted from the corresponding values of the LIBOR (London Interbank Offered Rates) US dollar means. These rates are also available on the LBMA website.

 

How are the GOFO means established?

 

At 10.30 am London time, the Reuters page is cleared of all rates. Contributors then enter their rates for all time periods. A minimum of six contributors must enter rates in order for the means to be calculated. At 11.00 am, the mean is established for each maturity by discarding the highest and lowest quotations in each period and averaging the remaining rates.

 

What are some uses for GOFO means in the market?

 

They provide a basis for some finance and loan agreements as well as for the settlement of gold Interest Rate Swaps.

 

* * *

 

Unpleasant similarities with Libor and most other fixed (literally and metaphorically) rates aside, what is known is that under normal market conditions, GOFO is always positive, or in other words gold serves as a money-equivalent collateral for a pseudo-secured loan against paper fiat (USD in this case) hence the low interest rate.

 

Sometimes, however, normality inverts and the rate goes negative and as such serves as a useful indicator of gold market dislocations. Thus, while disagreements exist, one can safely say that what GOFO is, is simply a blended indicator of liquidity, counterparty or collateral (physical availability) stress in the gold market. Since it is next to impossible to isolate just which component is causing the indicated disturbance, it is prudent to be on watch for all three.

 

The best-known example of a complete collapse in the GOFO rate, is the September 1999 Washington Agreement on Gold, which in brief, was an imposed "cap" on gold sales (mostly European in the aftermath of Gordon Brown's idiotic sale of UK's gold) to the tune of 400 tons per year. The tangent of the Washington Agreement is quite interesting in its own right. Recall the words of Milling-Stanley from the 12th Nikkei Gold Conference:

 

"Central bank independence is enshrined in law in many countries, and central bankers tend to be independent thinkers. It is worth asking why such a large group of them decided to associate themselves with this highly unusual agreement...At the same time, through our close contacts with central banks, the Council has been aware that some of the biggest holders have for some time been concerned about the impact on the gold price-and thus on the value of their gold reserves-of unfounded rumors, and about the use of official gold for speculative purposes.

 

"Several of the central bankers involved had said repeatedly they had no intention of selling any of their gold, but they had been saying that as individuals-and no-one had taken any notice. I think that is what Mr. Duisenberg meant when he said they were making this statement to clarify their intentions."

 

Of course, this happened in a time long ago, when the primacy of Fractional reserve banking was sacrosanct, when the first Greenspan credit bubble (dot com) was yet to appear, and when barbarous relics were indeed a thing of the past, only to be proven oh so contemporary following not one, not two, but three subsequent cheap-credit bubbles which have vastly undermined the religious faith in faith and central banking, sending the price of gold to all time highs as recently as 2011.

 

Another subsequent negative GOFO episode occurred in early 2001, which coincided with what has been rumored to be a speculative attack and reversal of the futures market. However, while pushing 1-month rates negative, 3-month rates remained well positive.

 

Indeed, the only other time when both 1M and 3M GOFOs were both negative or almost so (3M touched on 0.05%) was in the aftermath of the AIG bailout following the Lehman collapse in November 2008.

 

Fast forward to today, when all GOFOs, from 1M all the way to 6M just went negative.

 

And while both Antal Fekete and Sandeep Jaitly, traditionally two of the most vocal pundits in the arena of gold backwardation and temporal and collateral gold market arbitrage, are likely come up with their own interpretations of what may be causing this historic inversion, the reality is that one can't know for sure until after the fact. It may be one of many things:

 

• An ETF-induced repricing of paper and physical gold
• Ongoing deliverable concerns and/or shortages involving one (JPM) or more Comex gold members.
• Liquidations in the paper gold market
• A shortage of physical gold for a non-bullion bank market participant
• A major fund unwinding a futures pair trade involving at least one gold leasing leg
• An ongoing bullion bank failure with or without an associated allocated gold bank "run"
• All of the above

 

The answer for now is unknown. What is known is that something very abnormal is once again afoot at the nexus of the gold fractional reserve lending market.

 

-END-

 

*Rocket Rich...

 

Folks,..

 

As ever cautioning any interested parties that my Chartism abilities have been found wanting these last few years, I can't help but note where we have reached on this Bonfire of a Correction,..

 

As one can see, we have now slipped below (on a Linear Graph basis) the lower monthly support line, a line that has not been breached since the inception of this present Bull Cycle!.. Of course the Month has only just begun and as such it will be most interesting to see whether this line holds in the next 25 days,.. If it does (and it did in the collapse of 2008) then it means we are presently underwater here in Price Terms, arguably presenting us with the 'Mother of all Entry Points!),..

 

The Curved light blue lines highlight the significant rise in Price that occurred in the months ahead on all the other times we touched this line!..

 

Le Metropole Cafe

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__________________________

 

Jim's Mailbox - www.jsmineset.com

Jim,

When the stock market goes higher on prospects of continued QE, AND the stock market goes higher on discontinuation of QE... it should set off red flags in your investment decisions.  Namely, STAY AWAY!

Something is not Kosher.

Then to top it off, the Street (who in the past, hung on his every word) ignores former Fed Chairman Greenspan's warning to get into gold, stat!  Another BIG red flag.

Be smart.

Be safe.

Be in gold.

These are not times for hubris!

CIGA Wolfgang

Post-Election Reality Check

Gold prices end sharply lower as the U.S. dollar soars. U.S. stocks end mostly higher on a rebound in oil prices. Gold last traded at $1,145 an ounce. Silver at $15.44 an ounce.

The mid-term elections are behind us and it appears the political landscape in America is changing.

But how much is really changed?

Historically, political developments have had less impact on the investment world and financial markets than economic developments and fiscal and monetary policy. The key going forward will be the future of those factors.

As expected, last week the Federal Reserve announced it would be ending its open market bond purchases known as Quantitative Easing (QE). The bond-buying campaign helped to fuel one of the largest stock market bubbles in American history.

The impact on the rest of the economy is much harder to assess. Some economists dismiss the purchases as inconsequential. And some say the Fed has exacerbated economic inequalities by helping to lift financial markets while the rest of the economy languishes.

One critic of the impact of QE is former Fed Chairman Alan Greenspan. Greenspan said, "I don't think it's possible for the Fed to end its easy-money policies in a trouble-free manner."

Greenspan also said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

Wall Street is ignoring his warning evidently as, despite many worrying signs, the stock market has once again hit record heights.

Jim

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