David Schectman

Quotes of the Day

The much smaller size of the silver market, limited above-ground silver inventory, and stretched level of the gold/silver ratio, means that a major reversal in the gold price would have a disproportionate impact on the silver price.

Silver is unique as it is both a monetary metal and an industrial metal. Unlike gold, there are limited above-ground stocks of silver because so much has been consumed in industrial applications. As stated earlier, the official estimate for the world gold stock is 177,200 tonnes, or 5.7 billion oz. Nobody knows the level of above-ground silver stocks, although the majority of estimates are in the 1.0-2.0bn oz. range, i.e. between 17-35% of the comparable figure for gold.

Of the estimated 177,200 tonnes of above-ground gold stocks, approximately 31,500 tonnes are reportedly held by the central banks. These institutions are able to lease this gold into the market to affect the price. Central banks, as far as we are aware, have divested their silver reserves.

The gold/silver ratio is currently 73.0 having averaged 15-16x for several thousand years. At times, it has even been considerably lower. For example, the ratio was 12.5 times during the era of Alexander the Great in the fourth century B.C. and was fixed at 12.0 during the Roman Empire. The ratio started to rise with the progressive demonetization across Europe and the US in the late nineteenth century, which culminated in China jettisoning the silver standard in 1935.

During the last 20 years, the ratio has generally traded within the 50-70 range. Having said that, there was only 8.3 times more silver mined than gold in 2013; so some "reversion to the mean" (15-16x) might be justified in the coming years.

- Paul Mylchreest, December 6, 2014

[Speculative] position limits were fought by JPMorgan over the past five years because such an enactment would have been a disaster for the bank, which held a massively concentrated short position in COMEX silver during this time.  If JPMorgan was forced to buy back its silver short positions in excess of proposed limits, or even if the bank were prevented from adding new shorts to cap the price, the price of silver would have soared. Now that JPMorgan no longer holds a massive concentrated short position in COMEX silver---as I hope I have conveyed---the enactment of position limits could very well benefit the bank (if I am anywhere near close on how much physical silver the bank has acquired).

- Silver analyst Ted Butler, Butler Research

- Widening Fourth-Quarter Trade Deficit Should Hit GDP Growth Hard 

- October Median Household Income in Continued Low-Level Stagnation 

- Full-Time Employment Is 2.4 Million Shy of Pre-Recession Peak 

- Headline Unemployment Really Increased by 0.1%, But Gain Was Hidden in Rounding Details 

- November Payroll and Unemployment Data Heavily Skewed Again By Volatile and Inconsistent Seasonal Adjustments 

- November Unemployment Rates: 5.8% (U.3), 11.4% (U.6), 23.0% (ShadowStats) 

- Downtrend in Inflation-Adjusted Construction; Annual Growth Turned Negative in September and October 

- November Money Supply M3 Annual Growth Surged to Five-Year High

- John Williams, Shadowstats.com, December 6, 2014

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Today's Featured Articles

Greg Hunter (WNW 169-Race Distraction, USA #2, US/Russia Coming War?)

Ed Steer (I shan't hazard a guess as to what prices will do in any of the precious metals going forward, but I am on the lookout for another engineered key reversal to the upside, as JPMorgan tries to rid itself of the last of its silver short position in the COMEX futures market---and as HSBC USA and Citigroup attempt to do the same in gold.)

Jim Sinclair (Koos Jansen: Belgium's central bank considers repatriating gold) (US resorts to Illegality To Protect Failed Policies)

Zero Hedge (Only Yesterday - How The Federal Debt Went From $1 Trillion To $18 Trillion in 33 Years) (Voices Grow Louder To End The US Dollar's Reserve Status)

LeMetropole Caf�(Is Indian gold turnaround a game changer for prices?) (An Inside Look At The Shocking Role Of Gold In The "New Normal")

Bill Holter

The Mother of all Bank Runs!

December 8, 2014

Do you remember seeing old pictures of the Great Depression which depicted "lines?"  There were two types, bread lines and also lines to the front doors of banks.  While we don't see any bread lines today, trust me, there are bread lines in every single state and long ones at that.  Nearly 50 million people in the U.S. survive on SNAP, EBT cards or whatever they are called in your state.  Can you imagine the "confidence" it would instill if each day on your way to work you saw massive lines of people waiting for breakfast?  Or, when you came home from work you turn on your television only to see long lines again, this time for supper?  I can see it now, some reporter out on the street giving us the "good" unemployment, inflation or GDP news with a line of people in the background waiting for food.  My point?  False economic news would be harder to "sell" and even harder to "stomach" (pun intended).   

Back during the Great Depression there were also the other type of lines, these formed in front of banks.  Many banks either "ran out of money" or had poor investments which led to their demise.  We also had this type of activity in the U.S. in 2008-09 ...but again, we just didn't see them.  There were "electronic runs" of all sorts which we either didn't hear about or never saw ...but they did happen.  This is why so many banks, brokers and mortgage companies were rolled up together and merged.  The failures had to be hidden as best they could from the public's eye because fear would have bred more fear.  This cannot be allowed in a system built and standing alone on "confidence".

I mention the above because another situation is now arising, another "line" is beginning to form.  The current line formation is unfortunately the scariest imaginable, we are facing the Mother of all Bank Runs!  This past week Willem Middlekoop uncovered another central bank asking for their gold back, Belgium.  We already know Germany had publicly requested their gold back beginning in early 2013 and gotten very little so far.  Just a couple of weeks back, The Netherlands announced the repatriation of 122.5 tons of gold ...after the fact.  When the announcement came, it said the transfer and transaction had already been done.  Several days afterwards, a leading candidate for France's next election also brought up the possibility of French gold being repatriated ...and now it's Belgium!!!  

Notice I used three exclamation points, I did so because of all the central banks to request their gold back; Belgium in my opinion would be the very last to do so with one "caveat."  The caveat being "unless something REALLY big has changed," let me explain.  First, Belgium is the "seat" of the European Union, this is where all European decisions are made and announced (with Germany's approval of course).  The decision to repatriate gold from the "safe haven" of New York and to do it publicly raises eyebrows on its own, but this is Belgium, not "just some country" in Europe.  Brussels is where the EU itself is headquartered.   We are talking about a dealing between the #1 and #2 Western central banks in the world, did the EU or ECB in Frankfurt give the OK to ask for repatriation?  Yes I understand, Belgium's central bank is not the ECB but would they or any other central bank request repatriation without ECB approval?  The same could be asked of both Germany and The Netherlands, they must have had prior approval before asking for their gold back?

Looking at this a little further, I remind you of earlier in the year when it was discovered "Belgium" was holding some $400 billion worth of Treasury securities.  This was termed the "Belgian bulge" and not really explainable because Belgium as a country did not have the wherewithal to have purchased this amount.  Either this was done via proxies or with ECB help or some other manner, it has never been explained to my knowledge.  I mention this because of the important "tie" apparently between the U.S. and Belgium.  If "Belgium" trusted us so much to have purchased $400 billion worth of Treasuries, then why repatriate their gold?  Belgium has 227 tons of gold, we found out in 2011 that 86 tons of this amount were on lease, leaving approximately 141 tons at the FRBNY.  This is only worth in current dollars somewhere close to $5 billion.  The "ratio" if you will is better than 80 to one, Treasuries to actual gold "held" but not leased (hopefully?).

Why does it even matter what the ratio is?  Let's walk this through, because we are talking about the issue of "trust".  The only reason one would repatriate gold is because they want it in hand.  If you believed your gold was safe and sound, protected and "actually there," no one would ask for their gold back.  Belgium has displayed their confidence by holding $400 billion worth of U.S. Treasuries ...but apparently not with the U.S. holding less than $5 billion worth of gold?  Why the dichotomy of trust?  Actually, I will use a better word, "bifurcation" of trust, and yes there is a pun within this one too.   

Another piece of news out of the ECB (Belgium) this week was the classification of member's gold reserves.  Koos Jansen brought this to our attention which on its own is very big news but has now been overshadowed by the repatriation news though most definitely connected.  The member states it seems they are being told to differentiate between allocated and unallocated gold, and to also break down swap positions and receivables.  Theoretically this should make gold holdings less opaque and more clear to view, but why?  Why change the reporting and why now during the repatriations...?   

I of course do not have the answer but we can speculate something has and is definitely changing, and this "something" is HUGE!  I say huge because these events are a change to policy which has stood the test of 70 years' time.  For the last 70 years, the world has stored their gold at the New York Fed and never asked for it back. Other than Germany withdrawing 1,000 tons from the Bank of England in 2001, Venezuela is the only country to ask for their gold back...until now.  The only way to describe what is beginning to happen is to call it a bank run, The Mother of all Bank Runs and an "old fashioned one" at that!   

This will be very interesting to watch exactly because of the "old fashionedness" and the scramble for what we have been told and taught for so long to be a worthless barbarous relic, gold.  Current day bank runs as you know have been papered over time and again, just look at Fed, ECB and BOJ balance sheets to understand this fact.  They continually printed new monies and bought failing paper from dying banks to keep them alive.  The creation of new money was the key, the fact that gold cannot be created out of thin air is the sticking point.

As this bank run progresses, please keep in mind the central banks will be telling anyone willing to listen, what the true definition of money is ...by their actions...without actually saying it.  As central banks fight over gold, they will be standing publicly and buck naked telling the world exactly what money is and what it isn't.  Watch as the central banks fight over what today are meaningless dollar amounts of gold.  Do you understand what I am trying to say here?  For central banks to even care about a few billion dollars is a ridiculous thought, but maybe it's not "just a few billion dollars?"  Maybe they are beginning a fight over "all the money in the world?"  Please understand, this is for all the marbles!   

One last note, if it turns out Belgium does decide to repatriate their gold, this would mean Germany, Holland and Belgium have all done the same exercise.  I would add that Austria would probably be next ...which would mean what?  The stage would then be set for a likely breakup of the formal EU into "north and south" regions.  These nations while holding gold in hand would benefit from a markup in gold prices and allow for a "northern euro," backed partially or on a ratio basis to gold.  The line is forming and the back of the line is no place to be!

All Economic Data Are Lies

December 8, 2014

Barron's, which like the Wall Street Journal, Financial Times and other financial publications has caused readers to lose billions if not trillions over the years; ironically, whilst feigning "conservative" investment principles. Of course, they are no less "conservative" than CNBC and other bottom fishing MSM cheerleaders - who cumulatively have as little care of investors' well-being as the Fed of "the economy"; or politicians, the "99%" that don't fund their campaigns. In a nutshell, sensationalism sells and bullish sensationalism even more. Which is why, this weekend's blaring Barron's headline that "this time is different" - no less, on the 18^th anniversary of Alan Greenspan's infamous "irrational exuberance" speech - is as ominous as it is disingenuine.

And the same goes for Wall Street; which atop taxpayer funded "bailouts" - via the Fed's printing press - as a "reward" for such criminality. Which is why this week's commentary from Goldman Sachs is as frustrating as it is typical. To wit, just two weeks ago, Goldman's strategist set a year-end 2015 S&P 500 target of 2,100 as it traded at 2,052. He started 2014 with a year-end target of 1,900, but later raised it to 2,050 under the time-honored explanation of "multiple expansion," despite the S&P already trading near a record-high P/E multiple, amidst the lowest "earnings quality" of our lifetimes. Fast forward to the aforementioned comments two weeks ago, wherein he claimed S&P 500 multiple expansion was OVER. That is until one of history's most blatantly PPT-engineered rallies, pushing the S&P 500 up to 2,075; after which, no doubt his masters told him to be "bullish-er." And thus, he yesterday "changed his mind" about the end of multiple expansion he espoused two weeks ago, enabling a "new and improved" 2015 year-end target of 2,300.

Trust me, I know what I'm talking about as I was a Salomon Smith Barney sell-side analyst for seven years - culminating with the infamous conflict of interest scandals headlined by Jack Grubman's championing of Worldcom, Global Crossing and countless other Salomon banking clients, all the way to bankruptcy. Jack's office was right down the hall from mine; and thanks to his charisma, I was bumped off the "morning call" with our sales team countless times, so he could hype any and every movement of Bernie Ebbers and other Salomon financed telecom fraudsters, in lieu of my "bland" commentary about oilfield services.

In other words, just as Barron's is motivated to say "this time it's different," or Goldman Sachs to relentless raise its stock targets, the government - all governments, for that matter - lies through its teeth to create the impression of "recovery," "expansion," and all manner of vote-garnering propaganda. Why anyone believes a word Washington or Wall Street saysis beyond me, as their perma-bullishness has all but destroyed the "99%" over the past 15 years - first in the dot.com crash they caused; next in the real estate collapse they created; and finally, the debt slavery their printing and spending orchestrated. Today, the global economy sits at its low point of our lifetimes, whilst both debt and the cost of living have reached historic highs; and sadly, the paths of least resistance will exacerbate these trends for the foreseeable future. So is the terminal phase of a Ponzi scheme; in this case, history's largest.

To that end, Thursday's Audio blog was titled "crashing oil and currencies, America's death knell." And what happened on Friday, following the supposedly "mega-bullish" NFP report - which for all intents and purposes, the BLS literally made up? Yes, currencies the world round had one of their most dramatic one-day declines on record, whilst oil prices crashed to last week's post-OPEC lows. It is truly shocking how few people realize the recent "dollar rally" is no different than in 2008; i.e., catalyzed solely by fears of global economic collapse and NOT U.S. "economic strength." In fact, the flat out lie the NFP report was (notwithstanding a 36-year low Labor Participation rate, a Household survey purporting negative November job growth, an anomalistic positive birth/death figure in a month that is typically negative and the same miserable job quality as always) was contrasted by worse than expected, sharply negative factor order growth; a much worse than expected trade deficit and much lower than expected consumer credit growth. In other words, the November NFP report was "par for the course" on the "island of lies" that is U.S. employment data reporting.

To that end, the deeper the oil price crash gets, the more information we receive as to just how dire the situation is becoming. Recall, last week we noted that one-third of all S&P 500 capital expenditures have been in the energy sector in recent years, which were already declining before this Fall's historic price plunge. Not to mention, an incredible $210 billion of energy-related "high-yield" bonds are outstanding - the vast majority related to shale oil - representing 15% of the entire junk bond market. Which, as you can see here and here and here are in freefall mode. Better yet, since 2007, all U.S. job creation has been in the shale oil industry, with cumulative job growth of all other sectors negative. And oh yeah, care of the recent oil price plunge it is estimated that $150 billion of previously anticipated 2015 E&P (exploration and production) spending will be cancelled in a world economy already in, or on the cusp of depression.

Back to government published "economic data"; at some point, people have to question why anyone believes a shred of it. For one, with such large economies with thousands, if not millions of moving parts, how can anyone believe such data can be precisely measured - much less, by inefficient government bureaucracies with blatant political agendas? Or, for that matter, how does Wall Street - i.e., Washington's largest financial backer and partner - generate such precise "expectations" of such data, aside from being "handed the keys" to the government's fraudulent calculation algorithms. And care of relentless manipulation, not only are markets and media moved by lies, but the difference between a "make" and "miss" can be an infinitesimal tenth of a percent with essentially no statistical significance. And this, amidst an environment of broadly collapsing economies, which even a reasonably intelligent fifth grader can understand.

Worse yet, the myriad data from private sources - which invariably, have their own biased agendas. For example, the ADP employment report; which for some unknown reason, desperately attempts to mimic the fraudulent NFP report - to the point that last year, it downwardly revised several years of data in dramatic form to match the BLS' lies. Of course, this week's NFP report was so off-the-charts fraudulent, even ADP (which issued a miserable November employment report just two days earlier) couldn't come close to mimicking it. Then our fed housing data from the NAHB, or National Association of Home Builders and the NAR, or National Association of Realtors; both of which consistently depict "sentiment" dramatically higher than sales - and both of which, like ADP's employment data have recently been subject to dramatic negative revisions. Of course, only in precious metals are its independent trade organizations overly bearish - such as the consistently anti-PM propaganda published by the miner-funded organizations like the "World Gold Council" and "Silver Institute."

And the scariest part of it all is that the data most utilized by the Federal Reserve, in determining how many dollars to print out of thin air, are the aforementioned employment lies and the "twin towers" of inflation understatement; i.e., the CPI and GDP. So much of the fraud they perpetrate on the world is based on understating inflation - which even Yahoo! Finance is well aware of. To that end, my good friend Jeff Nielson put it perfectly last week, in averring that "lying about the rate of inflation is an activity which comes more naturally to central bankers and corrupt governments than breathing. While soaring inflation (particularly food and housing costs) cripples the standard of living for the working poor and shell-shocked remnants of the Middle Class; the Liars report near-zero inflation, and lament that inflation is too low. All that is missing are the crocodile tears."

Finally, we cannot emphasize enough just how moronic it has become to follow "diffusion indices" - especially government generated ones - to determine economic strength and/or the pace of economic growth. Such surveys are so statistically insignificant that even Wall Street mocks them; and as you can see below, they not only have little correlation to manipulated published GDP growth figures, but in different countries, often yield diametrically opposed results - in some cases, with not the slightest shred of logic.

Then again, if manipulated published 2Q U.S. GDP growth could be 4.6% with these ugly numbers, I guess anything is possible in the halls of economic book-cooking.   

So many other topics to address as I write Sunday afternoon - from Steve St. Angelo's latest devastating report on the collapsing silver mining industry; to "under the radar" legislation setting the stage for war on Russia - where by the way ruble-priced gold is at an all-time high; to Israel bombing Syria this weekend; Italy being downgraded to one notch above junk status; and this Sunday's Japanese "snap election" - where amazingly, Shinzo Abe appears likely to receive a "vote of confidence" in his Yen hyper-inflating scheme. And oh yeah, the breaking news that Belgium appears likely to demand repatriation of its gold in the coming weeks.

But that's the beauty of the Miles Franklin Blog - as for FREE, our three authors write five days a week - atop countless podcasts, audio blogs and other highlighted readings. Our job may be to sell precious metals, but our passion is educating the public of the TRUTH of economics and financial markets; and to that end, we assure you all these topics and many others, will be addressed in the coming days and weeks. David, Bill and I put our heart and soul into our work - which hopefully, you'll recognize if and when you decide to buy, sell or store precious metals.

Central Banks Have Confused Investors About the Value of Gold 

December 8, 2014

Andy Hoffman joins Anthony Wile of The Daily Bell to discuss all markets are now manipulated on a 24/7 basis, Switzerland, the stock market, gold and silver.   To listen or read the interview, please click below.

WNW 169-Race Distraction, USA #2, US/Russia Coming War? - usawatchdog.com

By Greg Hunter On December 4, 2014 In Weekly News Wrap-Ups

USAWatchdog.com

By Greg Hunter's (12/5/14)

In The News Today - www.jsmineset.com

Posted December 6th, 2014 at 12:04 PM (CST) by Jim Sinclair

Jim Sinclair's Commentary

You think this trend might just be growing?

Koos Jansen: Belgium's central bank considers repatriating gold

Submitted by cpowell on 04:57PM ET Friday, December 5, 2014. Section: Daily Dispatches

12:55a GMT Saturday, December 6, 2014

Dear Friend of GATA and Gold:

Following those in Germany and the Netherlands, Belgium's central bank is considering repatriating its gold reserves, Bullion Star market analyst and GATA consultant Koos Jansen reports tonight, citing the Flemish commercial broadcaster VTM:

https://www.bullionstar.com/blog/koos-jansen/belgium-investigating-to-re...

CHRIS POWELL, Secretary/Treasurer

Gold Anti-Trust Action Committee Inc.

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In The News Today - www.jsmineset.com

Posted December 4th, 2014 at 9:22 AM (CST) by Jim Sinclair

US resorts to Illegality To Protect Failed Policies

Paul Craig Roberts & Dave Kranzler

In a blatant and massive market intervention, the price of gold was smashed on Friday. Right after the Comex opened on Friday morning 7,008 paper gold contracts representing 20 tonnes of gold were dumped in the New York Comex futures market at 8:50 a.m. EST. At 12:35 a.m. EST 10,324 contracts representing 30 tonnes of gold were dropped on the Comex futures market:

No relevant news or events occurred that would have triggered this sudden sell-off in gold. Furthermore, none of the other markets experienced any unusual movement (stocks, bonds, currencies).

The intervention in the gold market occurred on the Friday after the U.S. had observed its Thanksgiving Day holiday. It is one of the lowest volume trading days of the year on the Comex.

A rational person who wants to short gold because he believes the price will fall wants to obtain the highest price for the contracts he sells in order to maximize his profits when he settles the contracts. If his sale of contracts drives down the price of gold, he reduces the spread between the amount he receives for his contracts and the price at settlement, thus minimizing his profits, or if the price goes against him maximizing his losses. A bona fide seller speculating on the direction of the gold price would choose a more liquid market period and dribble out his contract sales so as not to cause a significant impact on the price.

More...

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Only Yesterday - How The Federal Debt Went From $1 Trillion To $18 Trillion in 33 Years- www.zerohedge.com

Submitted by Tyler Durden on 12/05/2014 12:51 -0500

In the great fiscal scheme of things, October 22, 1981 seems like only yesterday. That's the day the US public debt crossed the $1 trillion mark for the first time. It had taken the nation 74,984 days to get there (205 years). What prompts this reflection is that just a few days ago the national debt breached the $18 trillion mark; and the last trillion was added in hardly 365 days.

Continue reading on Zero Hedge.com.

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Voices Grow Louder To End The US Dollar's Reserve Status - www.zerohedge.com

Submitted by Tyler Durden on 12/05/2014 19:05 -0500

When no lesser establishmentarian than Obama's former chief economist Jared Bernstein called for an end to the US Dollar's reserve status, it raised a few eyebrows, but as the WSJ recently noted, the voices discussing how the burden of being the world's reserve currency harms America, more than just Vladimir Putin is paying attention. While some argue that "no other global currency is ready to replace the U.S. dollar." That is true of other paper and credit currencies, but the world's monetary authorities still hold nearly 900 million ounces of gold, which is enough to restore, at the appropriate parity, the classical gold standard: the least imperfect monetary system of history.

Continue reading on Zero Hedge.com.

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12/5 THE PLAN - www.lemetropolecafe.com

Any of us looking for "Action Jackson" time in December are dead wrong. Any of us looking for 2014 to be a banner year are dead wrong thus far. And what we have endured this year adds up to one big tedious drill, day after day. Yet, the funny thing is the big picture grows brighter and brighter because of what THEY have done. And as a result of this manufactured tedium, it is VERY likely leading to upside gold/silver price explosions, which will be very volatile. The longer the tedium, the more the gold/silver volatility on the upside we have coming ... a Newton's Law sort of reaction.

Could it be a gold reset? That would make our day, but it could wipe out the U.S financial markets via a futures market fiasco for the shorts, which makes it difficult to imagine unless orchestrated behind the scenes on a gradual basis over a period of weeks or months. The gold/silver markets are part of the U.S. financial market system. If the price of gold was reset overnight, the CME would blow up due to margin calls on the Comex that would not be paid. This would impugn the integrity of our bond, stock, and dollar markets ... as they are all related. Officialdom can't let that happen, but if a "reset" was controlled, the shorts would be forced out of their positions, or have to come up with margin call money daily. A major calamity could be avoided that way. "Could" is the operative word because if the market goes "bid" who is going to sell? The Gold Cartel, knowing what is coming, would back off ... unless they were ordered to sell so much to prevent a panic. Those ordered to sell could have already purchased gold/silver way out of the money calls on the Comex or in the Over The Counter market.

Is Indian gold turnaround a game changer for prices?

There has been a surprise move in India reducing its gold import restrictions and intimation from the RBI governor that further relaxation may be on the cards.

Author: Posted: Friday , 05 Dec 2014

LONDON (Mineweb) -

Something seems to have spooked the gold bears. We noted a few days ago that there seemed to be signs of new positive momentum building for gold, but then were worried that the big failure of the Swiss gold initiative might prompt another drive down in the gold price. Indeed it did, but the move was surprisingly short-lived and gold then recovered a remarkable $70 from the $1 141 low point reached to hit $1 211 before falling back a little. It then hovered around the $1 200 mark for a day and then showed another period of strength prompting the bulls to question (in hope) that this could be the start of something much bigger. It is still having trouble advancing far past the $1200 level though.

Almost unnoticed on Friday with news overshadowed by speculation about the Swiss gold referendum result - by then seen as a foregone conclusion - was the news from India that the government instructed the Reserve Bank of India to relax its gold import restrictions with the cessation of the rule demanding that 20% of gold imports had to be re-exported. All talk prior to this suggested that the RBI might actually be looking to extend gold import controls given the very high import levels over the previous couple of months and their impact on the Indian current account deficit (CAD)...

http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=261706&sn=Detail

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An Inside Look At The Shocking Role Of Gold In The "New Normal"

From Paul Mylchreest of ADM Investor Service Internationalhttp://admis.com/home

You thought gold was "only" for wealth preservation? You ain't seen nothing yet.

Long Nikkei/Short Gold: Profitable, dangerous and missed by everybody?

Has the market completely missed a huge long/short trade, which has helped to drive up the Nikkei and drive down the gold price for more than 2 years? One that puts risk-taking and leveraged speculation by our industry in an unfavorable light again.

http://www.zerohedge.com/sites/default/files/images/user5

/imageroot/2014/12/gold teaser.jpghttp://www.zerohedge.com/sites/default/files/images/user5/imag

eroot/2014/12/gold teaser.jpg

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Executive Summary

In the report we outline a thesis, which draws together a complex web of interactions between Japanese equities, the gold market, repo financing, BoJ monetary policy meetings and anomalies in the silver market.

These interactions began forming in late-2012, specifically around September, as far as we can tell. With hindsight, this was a pivotal period in recent financial history, when central banks embarked on a new phase of aggressive credit creation. We found no evidence of these interactions beforehand and think it is fairly unlikely that they are merely the result of coincidence.

At the center of this, it looks to us like a large, leveraged long/short trade has been built up which is long the Nikkei index and short gold. The more the Nikkei has risen, the more the gold price has been pushed down.

It's a clever trade from a cynical perspective, as we'll explain. However, it also raises concerns regarding risk taking and the measurement of risk, which have made speculative abuses by some entities in our industry (especially banks) only too infamous in recent years.

If we are correct about this trade, a shock affecting either the long or short side could roil financial markets if it was unwound in a disorderly fashion. Potential threats include:

• Growing criticism of Abenomics and weak economic performance in Japan;
• Increasing signs of schism in gold and silver markets between strong physical demand and price discovery which is dominated by paper instruments and which has almost reached nonsensical levels; and
• Interest rates in the repo market have started to rise with the Fed winding down QE3.

Going into a bit more detail...

We suspected that gold might be the short in a long/short trade when we noticed a reasonably close correlation between gold and interest rates in the repo market. The more the cost of repo funding declined, the more the price of gold declined.

The repo market is a major part of the aptly named "shadow banking" sector. It is also the nexus for investment strategies involving leverage and short selling. If gold was the short in a long/short trade, the next question was whether there was a corresponding long? We think that the answer is yes, the Nikkei.

If we cast our minds back to September 2012, we had the announcements of "QE3" by the Fed and the "Enhancement of Monetary Easing" by the Bank of Japan (BoJ). The initial reaction of the gold price was positive, which was hardly surprising, although it turned out to be short-lived.

The subsequent collapse in gold has been counterintuitive, especially when the demand for physical gold bullion has remained strong as we show. It has also given the impression that the impact of monetary policies, which are "loose", to a degree, which is unprecedented, is benign. It is much too early to reach that conclusion.

Major upward moves in the Nikkei and coincident weakness in the gold price can, in most cases, be closely tied to BoJ policy meetings for the past more than two years. This is especially true when BoJ meetings have included announcements of more aggressive monetary policy in support of "Abenomics." We cover examples of such price moves, which followed BoJ meetings in January 2013, April 2013, October 2013, May 2014, August 2014 and October 2014.

A number of unpleasant ironies are immediately apparent:

• It is helping to drive up equity prices in the country with the most rapidly expanding credit bubble and credit bubbles don't tend to have happy endings;
• It is simultaneously driving down the price of the ultimate safe-haven asset and thereby silencing price signals relating to market and financial system risk;
• It appears to be a leveraged trade, obtaining the leverage via ultra-low rates in the repo market. The latter is a source of systemic risk which is known to regulators but remains unaddressed; and
• The logical conclusion is that risk across the world's financial system is even more underpriced than market participants realize and many believe it is woefully underpriced.

We are in a global credit bubble in which the multi-trillion dollar expansion of central bank balance sheets, their imposition of near zero (or even negative) interest rates and control of entire yield curves (directly or indirectly) are at the cutting edge.

This has encouraged more and more speculation in risk assets, which, in many cases, is being enhanced by leverage and without a commensurate sense of heightened risk.

Japan is the "cutting edge of the cutting edge" of this expanding global credit bubble.

The "Long Nikkei" side of the trade is profiting from what is starting to look like a reckless and failing Japanese monetary policy which, rather than ending the economic stagnation, has pushed the economy back into recession. Perhaps the most important indicator to monitor is growth in real household income, which has been negative for the past thirteen months.

Assets on the Bo's balance sheet are already equivalent to 60% of Japanese GDP. They are set to grow at an annual rate of 17% of current GDP after the Bo's latest increase in its asset purchase programme. One could argue that the more that the BoJ's policy doesn't work, the more aggressively it's applied, the more the Yen falls and the more the Nikkei rises. Prime Minister Shinzo Abe's special adviser, Koichi Hamada, was honest enough to call it a "mild Ponzi game" in a recent interview with the Daily Telegraph.

In the meantime, the "Short gold" side of the trade is profiting in a cynical way from structural flaws, which are specific to gold and silver markets. In gold, price discovery is overwhelmingly dominated by an extreme ratio of paper gold instruments to physical bullion, estimated by official sources at about 90:1. This flaw in price discovery is being stretched to almost nonsensical levels in the face of strong physical demand.

If we are correct, the liquidity in the gold market, with well over US$100.0bn of gold instruments traded daily, implies that substantial financial firepower has been required to maintain the intense pressure on the short side of the trade during the last two years. A number of banks and hedge funds are likely to be involved, although it has undoubtedly attracted large numbers of trend followers.

Gold, and we are specifically referring to physical bullion, is also the only financial asset, which has no counter-party risk. That alone should make it increasingly sought as a hedge in a credit bubble driven by monetary stimulus undertaken on a rolling basis by central banks.

In a normally functioning market, i.e. one where supply and demand for the physical good holds sway, the huge movement of gold bullion to China, the world's largest creditor nation, should have dominated gold market news flow, seen western investors competing with Asia for scarce physical bullion and maybe even raised questions about the existing monetary order. As things stand, most investors could not care less about gold.

Where do we go from here?

While we have a strong preference for equities over nearly all forms of credit in an inflationary endgame, the road we are travelling - basically a never-tried-before monetary experiment to avoid debt deflation - is treacherous.

The question is whether deflation comes before inflation, as one of these two unpalatable outcomes will be required to extinguish the excessive debt burden carried by Japan and the global economy. It's also ironic that the only asset, which has historically outperformed in either inflationary or deflationary conditions, with a track record stretching back more than 400 years, is gold (cf "The Golden Constant" by Roy Jastram).

In Japan, Abenomics could lead to further substantial devaluation of the Yen. In extremis, the long side of the trade has almost infinite upside, especially if the architects of Abenomics refuse to let up and simply destroy the Yen. This is another reason why, being cynical, it's a clever trade.

While the Nikkei could theoretically go to infinity, the gold price (at least in terms of physical metal) does not have unlimited downside. Consequently, the inherent risk in the trade is asymmetric.

If the gold price keeps falling, offers of physical metal will be withdrawn at some point. That would cause a schism in the respective pricing of physical bullion versus inferior paper substitutes. The potential for such a schism is already being foreshadowed, periodically, by negative GOFO rates and backwardation in the gold futures market.

We have also looked again at anomalies in the silver market, which have left us scratching our heads for months. In contrast to gold, ETF silver holdings and open interest in the futures market remain elevated in spite of the even bigger decline in the silver price.

We question whether entities, which have put on this long/short trade have acknowledged that a rapid exit from a large short position in gold could be problematic. If so, we wonder whether a short position in gold is being partially hedged by accumulating long positions in (high beta) silver.

The much smaller size of the silver market, limited above-ground silver inventory, and stretched level of the gold/silver ratio, means that a sustained reversal in the gold price would have a disproportionate impact on the silver price.

From a cynical perspective, that would make this trade really clever.

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http://www.zerohedge.com/news/2014-12-04/inside-look-shocking-role-gold-new-normal

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