General Update
I will address the raging backwardation issue in the next post. This one is a general market and PM update.
Gold and silver are currently coming off highs achieved as a result of a major drop in the U.S. dollar due to the Federal Reserve’s desperate move last week to follow interest rates lower (something the Fed is loath to do — central banks generally like to be the ones setting interest rate policy for the markets, not vice versa). With Treasury Bills already trading near zero percent, the Fed set its own federal funds rate target at a level between 0% and 0.25%, which represents a drop of at least 75 basis points from the previous, failed, target level of 1%.
Setting interest rates essentially at zero was nothing less than a formal admission that the U.S. — and the rest of the world — now faces a deflationary threat at least as major as that confronting Japan for the past two decades. With interest rate policy now off the table, the next step is the so-called “Quantitative Easing” or as I prefer “Monetization”. This is the step that involves Fed Chairman Bernanke’s famous helicopter and is the reason why he feels so confident that modern central banking can slay deflation. That’s probably true, but at what cost?
Already Mr. Bernanke has publicly mulled the outright purchases of Treasuries by the Fed as a way of continuing to further boost liquidity. With yields on Treasuries hovering at record lows and foreign central banks indicating their willingness to dump some of their Treasury holdings (based on the recent drop in the amount of Treasuries held by the Fed in custody for foreign entities, the dumping may have already started), there might be a pretty good upcoming opportunity to do just that. If I had to guess, the net result would be a drop in the value of the dollar while Treasury yields revert back toward pre-November levels. When the U.S. dollar dropped all the way under 79 on the Dollar Index last week, it possibly achieved the majority of its move in just a few days. In under 1 month, the world’s “reserve fiat currency” retraced more than 50% of its 2008 rally and appears to be in the process of carving out a bearish head-and-shoulders pattern on the weekly charts.
If the pattern plays out, the next drop in the U.S. dollar could start as early as next week with a target around the 76 level. After that, the right shoulder would presumably be carved which takes the dollar back toward 80 sometime in January. That would be followed by the largest decline in the pattern down to around the 67 level. Ideally this would help drive gold to a new record high during the spring and perhaps even silver will play along. For this to happen I believe that some speculative elements will need to return to the PM markets, or at least stop fleeing it.
Moving on to Treasury yields, I expect the majority of the reversion to take place in a very short period of time. True, if the Fed starts buying Treasuries in large quantities, prices would be supported for a period of time. Once the Fed buying stopped, however, the subsequent drop would be fast and furious. My guess is that the next 3 months or so we will see Treasury prices zig-zag with a downward bias and then sometime in the spring there will be a major decline. This theory would be invalidated if 30-year Treasury Bonds rally substantially higher than the 140 level.
Let’s take a look at the monetary statistics. The latest reports from the Fed now show that reserve balances of banks have climbed all the way to a mind-numbing $800 billion and the vast majority of this liquidity is still being held with the Fed (as opposed to being loaned out) despite the paltry 0.25% annual interest being paid on these balances. The continuing increase in the banks’ reserve balances is of critical importance to the hyperinflation debate because the majority of monetary scientists, financial writers and other “experts” have explained the growth in reserves as being moderated by the U.S. Treasury’s Supplementary Financing Program (SFP) whereby Treasury issuances were supposedly serving to “sterilize” a portion of the Fed’s lending activities. The Fed’s injection of liquidity was supposedly mopped up in part through sales of Treasury securities under the SFP, resulting in a partial withdrawal of that liquidity from the system. There is only one little problem with such a trick — the Treasury ended up with all that liquidity, not the Fed. Did all the “experts” really think the Treasury would just sit on that money and not spend it?
Well, it turns out the SFP was nothing more than a one of several placeholders for a massive Treasury operation involving the sale of probably trillions in U.S. Treasuries. Here is how the Treasury said it:
The balance in the Treasury’s Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government’s financing needs.
There it is, plain as day: the Treasury is going to be using this debt to meet financing needs. So much for bureaucratic obfuscation! Whatever “sterilizing” effect the SFP may have had, it was temporary at best. Once again, my analogy of Ben’s helicopter seems to ring true: the Fed whirlybird has been loading up and dropping money but the rotor blades are creating an updraft that continues to keep the money from fluttering to the ground (for now).
Here is the critical part. As much as $800 billion is now caught in the “updraft” and this number is likely to grow. The net result is that the monetary base has already doubled form around $800 billion earlier this year to over $1.6 billion in the past week. Not only that, but the money supply has also started to accelerate in the past few weeks after spending much of the summer and fall in hibernation. For example, even the narrowest monetary measure, M1, has recently increased at an annual clip of 35% (between August and November 2008 as published in the FRB H.6 Release.) This trend will probably continue until there are measurable signs that the credit markets have become unstuck and economic indicators have bottomed. Judging by the present circumstances, we’re in the early innings. The game, however, could progress rather quickly, surprising even some of its best students. The first wave of the monetary tsunami I’ve spoken about in the past could hit as soon as the next 12-18 months, perhaps even sooner. Even perma-deflation gloomster Gary North has recently started warning his subscribers that the next monetary/economic shock will be hyperinflation, not deflation (which according to him is already happening).
Finally, let’s look at some fundamental factors in the silver and gold markets. First, physical demand remains strong as evidenced by the persistent retail bullion tightness and the recent additions of metal to the ETFs. Barclays silver iShares ETF has recently added 3 million ounces to once again approach the 220 million ounce level and Central Fund of Canada added almost 4 million ounces of silver as a result of its most-recent financing. Yet the strongest of the “silver gobblers” has been the Swiss ZKB ETF, which has now amassed over 32 million ounces of silver, a phenomenal 7 million increase since September.
On the other hand, and despite the publicized efforts to take delivery of COMEX gold, the level of delivery notices for December is truly anemic, running at only about 70% of last year’s rate. Silver is actually doing better — running about 85% of last year’s pace. Similarly, while the registered category of gold held in COMEX warehouses has barely budged since the beginning of December, there has been around 13 million ounces of drawndowns in registered silver stocks, with most of that silver apparently being kept in the warehouses but moved to the eligible category. Overall, these statistics tend to indicate that the attempt to bust the COMEX in December has been a complete bust.
Looking at the basis, we see no significant movements in the last week or so as both gold and silver remain at a very low level of contango and have not moved into measurable backwardation according to either my own proprietary methods or the publicly-available data. The flirtation with backwardation continues to be of great interest but we simply aren’t there yet. Interest rates have continued to decline with short-term LIBOR now under 1%, which I believe has helped keep gold and silver near backwardation. More on this in the next commentary.
I’ll conclude with a figure that I haven’t discussed in a while — the LBMA clearing statistics. For November 2008, the published statistics are 107.6 million ounces of silver traded per day on average, which is well off recent levels. In terms of dollar volume this is the lowest level of silver traded in London since November 2005. Of course, November 2005 was followed by the near-manic trading in April 2006, but those were very different times. For one, silver is likely to face headwinds from the commodity sector into 2009, or at least not receive very much support. By contrast, early 2006 represented the first mania phase of the current commodity bull. In light of all the rumors about the incredible physical demand for silver and the impending silver shortages, the November 2008 LBMA clearing statictics provide a sobering counterpoint. Yes, wholesale demand for silver is probably among the strongest for hard assets and commodities after gold, but it is nothing to write home about in comparison to periods like early 2006. The lack of observable extremes in gold and silver demand at the wholesale level is in fact a major reason why I am discounting the sporadic observations of backwardation.
FEKETE saids there was a BACKWARDATION
SZABO saids there was no BACKWARDATION
SRSrocco saids in 12 months….it won’t really matter
Tom
I have already posted in the last thread that LBMA clearing statistics are meaningless. Many of them are swap deals. Silver in, Silver out.
A low level of silver “trading” doesn’t mean that the wholesale demand for silver is poor. On the contrary, it means the demand is so high that the “swap deals” are reluctant.
Some figures from the Reserve Bank of Australia (RBA);
Notes on issue as of 17 Dec, up by 15.1% to $51.64 billion since 1 Oct, with an interesting negative correlation to Exchange Settlement Balances, bank runs anyone? That’s after an even more interesting run up in ESB’s, dodgy debt monetisation?
Term Deposits of Domestic Financial Institutions as of 17 Dec, at $18.53 billion, from exactly $0 billion on 24 Sept.
A simple trend line through Australian Government Deposits (with the RBA) since their peak in May ‘07, shows a balance of $0 round about early May ‘09. A long bow to draw? Possibly, but that’s the trend at present.
There is also a striking similarity between the run down in foreign exchange holdings of the RBA during ‘07 and the recent fall in the AUD. Methinks the RBA was unable to meet its liabilities, at least until there was an enormous deposit by an ‘Overseas Institution’ this October.
So much for the RBA’s main job of maintaining the value of the Australian Dollar.
I think I could do a better job of it.
Guys,
What about this?
http://meltdown2011.wordpress.com/2008/12/23/vaporize-comex-2008-12-23/
How do we fit these numbers?
I hope in the next article you will talk about the origin of basis statistics by exchange. It seems Dr. Fekete gets his backwardation statistics from Tocom (Japan). Now, there are conflicting opinions in general on this. Jim Sinclair (and I’m guessing Mr. Szabo you agree) says: stick with New York and London as the “market price”. On the other hand, Mr. Sinclair also pointed out that large Asian investors are getting increasingly concerned about the dollar. Therefore (my inference, not Sinclair’s), backwardation on Tocom (if it’s true) would potentially be significant, the stature of NY/London notwithstanding.
Anyway, it seems the issue is very murky (I can’t understand it), so any clarifications will be very helpful (and probably come in the fullness of time anyway).
TOCOM - the place where the US investment banks like GS seem to hide out.
some data on house positions on TOCOM from a junior stock forum at Stockhouse.
http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=25481250&l=0&r=0&s=CPQ&t=LIST
To summarize, GS is now net long and most large traders have covered over the past 2 years.
Merry Christmas! To Tom and to all.
Tom L……Fekete did mention the TOCOM concerning Backwardation….but he also stated that he got the BEST BID and BEST ASK prices from 300 banks from all over the world.
FOR EVERYONE ELSE IN THIS BLOG:
I really think you are witnessing the end of the US GOVT and EMPIRE. This is not a DEFLATION-DEPRESSION SCENARIO…..this is a complete DISINTEGRATION of the UNITED STATES as we know it. I agree with several other GOOD FUNCTIONING BRAIN STEMS out there, that within the next several months…..US CITIZENS we see a complete collapse of the US GOVT. We are not heading into a JAPANESE SCENARIO…..as many so called “BRAIN DEAD ANALYSTS” state.
When I put on CNBC and listen to many of those SUITS saying that we won’t have a “V”, or “U” correction but more like a “L” shaped recovery…..I want to throw a 10 POUND SPIT WAD at the TV SCREEN. The only ones who have any GLIMMER of a LIGHT UPSTAIRS has to be RICK SANTELI on the CHICAGO BOARD OF TRADE, and PETER SCHIFF a frequent guest. Besides that……the LOT OF THEM are a complete waste of time….especially STEVE LIESMEN…..and if you notice his last name is spelled LIES-MEN.
As for the TOM SZABO and ANTAL FEKETE…..I think the are both wise in what they do…..but after going back and reading all of FEKETE’s older articles….especially the REAL BILLS DOCTRINE…..I favor FEKETE in his DIRE FORCAST once gold goes into PERMANENT BACKWARDATION. I believe most don’t have a clue just how fast this US ECONOMY and FINANCIAL SYSTEM will COLLAPSE and go into CHAOS. It’s not a matter of years….it’s a matter of MONTHS.
The SOVIET UNION collapsed back in 1989…..but they still had a 9 million barrel a day OIL PRODUCTION. And because their DOMESTIC CONSUMPTION was only about 3-4 million barrels a day….they could export the rest, and use the profits to pull their ECONOMY out of the DEPTHS of HELL. The UNITED STATES has a 19-20 million barrel a day CONSUMPTION and only a 6-7 million barrel a day SUPPLY. As you can see…..the UNITED STATES is up the river without a PADDLE…..or GOING to HELL in a HANDBASKET
What is coming in the next 3-12 months will completely SHOCK the majority of US CITIZENS. GOLD will more than likely go into PERMANENT BACKWARDATION…and the COMEX GOLD WINDOW will close as well as the SILVER WINDOW. The USA will implode and disintegrate into several smaller regions and the LUXURY of going to the SUPERMARKET and picking amongst thousands of wonderful food products will be no more.
We will head into a COLLAPSE much like the SOVIET UNION….the big difference will be due to the fact that the majority of RUSSIANS lived in STATE issued housing and were not EVICTED if they could not pay rent. Whereas, in the USA….millions will be OUT IN THE STREET because the BANKS own the homes…..not the state. In RUSSIA…many could go live with relatives who lived in the country that had small gardens. No such luck in the UNITED STATES…..most live in the SURBURBS with nice landscaping.
The degree of CHAOS and PAIN the USA will FACE will be due to the GREATER SUBURBAN SPRAWL compared to RUSSIA. When the CHAOS begins, I believe the US MILITARY will be put into the largest cities….as they can control more people in a centralized area. Either the US GOVT or REGIONAL GOVTS will protect the country where the farms are….as they realize this is the FOOD SOURCE for the country….and not the city. CITY FOLK will not be allowed to leave the city….unless they have the proof to go live with family or friends in the country. The old saying…WHAT HAPPENS IN VEGAS…STAYS IN VEGAS will be the new motto when it comes to LARGE CITIES throughout the USA.
We have passed the POINT of now RETURN now. The time to get out of the BIG CITY is NOW. By having GOLD and SILVER BULLION plus bulk food to last for a year to two will be a good HEAD START.
I fully agree with SRS. The dead-ghost of Christmas consumerism is upon us. There will never be another Christmas like the one we just had. Going forward, this is survival.
SZABO or FEKETE? either way a HUNGARIAN is right?. The USA could even be aiming to beat the Hungarian 1946 hyperinflation world record of prices doubling every 15 hours… in the end it was 400 OCTILLION old pengo to the new monetary unit - a DELIBERATE plan to destroy the wealth of the middle classes before introducing the new communist currency. And your gold was either in the ground, in a Swiss vault or being beaten out of you in a prison cell…
http://www.reformed-theology.org/html/books/bolshevik_revolution/
SRS, you are so naive. Why would a dictatorship make an exception with you, the farmer, a kulak (http://en.wikipedia.org/wiki/Kulak). Don’t be delusional, no-one will be safe! We, Hungarians lived through every kind of dictatorships. We had precedents for this, too. Nothing will surprise us!
Act now till you can. Save your Republic instead of running away!
Andras……..I appreciate your candor. I have said before there are no guarantees in life. My move to the country was to live a less stressful lifestyle with my wife and to grow a good portion of our own food. I don’t trust the FRANKEN FOODS that are grown today…and I don’t care for the shallow SUBURBAN LIFESTYLE.
Anything can happen….and of course I can’t control it. Our decision to move to the country goes above and beyond the future disintegration of the United States. Entropy will do its job with or without us. This system will collapse because it has to. We have a LEECH and SPEND economy that cannot survive. I am all for the USA to transition into a more Green Manufacturing local way of life.
You say Hungarians lived through every kind of dictatorship. That’s a good thing. With that said…..they can’t kill everyone as you proved most Hungarians lived through the worst. This is a good sign for Americans to shoot for.
I don’t call a move to the country RUNNING AWAY…..as the people came from the country first before they moved into the city. In all reality…the CITY can not SURVIVE without the COUNTRY and FARM. But the COUNTRY and FARM can survive without the CITY. The country and the farm are the basis for allowing civilization to survive. People can save their republic from both the city and the country. I just advise people that being in smaller towns and villages might be better when things get rough in the big city.
All you can do….is the best that you can do.
SRS, my friend, I agree. Let me know if you have an opening on your farm.
what is the latest figure on Comex silver and gold warehouse inventory??
mike: 2.8M oz gold registered, 5.7m eligible, 8.5 total. silver is 67.2M oz registered, 59.5M oz. eligible and 126.7M oz. total. These figures available in daily tables at NYMEX site: http://cmegroup.com/trading/energy-metals/nymex-daily-reports.html.
keseri: the clearing statistics are not just swaps, in fact, they specifically EXCLUDE book-only trades. That is why they are CLEARING trades!!! If you will note, the high clearing volumes correspond with periods of relatively high metal demand and low clearing volumes correspond with periods of relatively low metal demand. True, “swaps” can and do involve physical transactions that are reflected in the clearings and there is also a bunch of other stuff in there that has nothing to do with wholesale demand so the picture isn’t that “clear” at all, but that is why I don’t dwell on these statistics and use them only in the general sense and not often at that.
SRS might like this link:
A former Russian tycoon has chosen to avoid the crisis by raising sheep.
The article says:
“Now Sterligov, 41, is promoting an electronic barter scheme for commodities trading that he claims could save Russia’s foundering financial system.
But he has no plans, he said, to return to the traditional capitalist road, saying his luxury-loving former colleagues among the superrich will soon see the virtues of simplicity and self-sufficiency.”
http://www.themoscowtimes.com/article/1010/42/372871.htm
Watch Eastern Europe and Russia as they are following Iceland’s destiny.
Watch for riots!
Sources are telling government & police will knock it down!
http://www.themoscowtimes.com/article/600/42/373091.htm
Some reliable sources in Ukraine tell me they have lost internet connection. Some internet providers have gone bankrupt. Is anyone prepared to internet failures in the West? What about internet banking?
Silver ETF has picked up some volume this week, ZKB’s silver ETF is now available in EUR and GBP tranches too. 100 oz bars from the Cook Islands cost 14 USD in Germany, minus our 7% sales tax that’s equal to the 13 USD you have to pay for silver rounds in the US. Physical silver market seems to have a life again while the futures market is still in disorder. When you look at the spread between WTI and Brent you can see that there is no one out there who can exploit current mispricings. All hedge funds seem to have gone bust. That’s why I think it leads to nowhere to discuss backwardation in silver and other market “anomalities”. The whole world has switched into “disorder mode”.
I would like to know if anyone else is a TAD DISAPPOINTED with the METAL AUGMENTOR and this BLOG? I wish I has spent the money instead on either a JIM WILLIE CB or a ROB KIRBY subscription. At least you can find out information above and beyond just metals. Hell, at least you get information.
Anyhow……SILVER is up $.71 today. JPMORGAN and CITICORPSE are down…..JPMORGAN is down almost 30% from JAN 1, 2009. What a nice day if you ask me.
I wish I had, not…has spent ^
I am also disappointed by Tom’s frequent disappearances. Crawling creepers of the internet are taking full advantage. If you ask Tom, his reply would be that he is not attached to this blog by ball and chain. As if we are.
SRS ….what I found encouraging about this blog is the average IQ is on the higher side for the commentators. Lately this is getting reduced continuously by those stupid bots. Very annoying.
Torsten found out the perfect way to beat these guys. Congrats Torsten.