Thursday, February 17, 2011
Gold Confiscation Chatter once again
It seems as if there is some sort of universal law, akin to gravity or centrifugal force, that whenever the price of gold is moving higher, talk MUST surface about it being confiscated by the US government. I do not know whether this is also related to the tides or activity on the surface of the sun but it seems as if it is designed to create a sense of near panic among those who want to buy the metal against an inevitable devaluation of the US Dollar.
Rather than spending untold hours of precious time answering individual emails, I decided to just post a short response to this here.
First of all, there is no need for the US government to confiscate gold because they do not need it. The reason it was confiscated in the early 30's by the Roosevelt administration was because they needed more gold in order to ramp up the money supply. While the domestic gold standard was killed, the US was still on an international gold standard. Balance of trade payments was still handled in gold and it would either flow in or flow out of nations depending on how that trade balance rose or fell with its trading partners.
Today, there is no gold standard which is also the reason that there exists such massive trade imbalances among nations.
Secondly - the US monetary authorities do not need gold to ramp up the money supply. Think two little letters: "Q" and "E" and put them together: "QE".
QE1 was $1.25 TRILLION and QE2 is $600 billion or $900 billion if you count agency debt. Has the Fed needed a single ounce of gold to add $2 trillion in new "money" to the system?
Thirdly - there is no shortage of gold among the US holdings in the sense that we have a significant amount. Reported holdings of the US are over 8,000 tons. Of course we do not really know how much gold we actually do have because we cannot audit the stuff and have to trust our masters not to lie. But that is besides the point. The real point is the US government officially values the sum of our gold holdings at the ridiculous price of $42.22 when the market price is closer to $1,400.
http://www.fms.treas.gov/gold/index.html
Fourthly - If the US would merely change the way it accounts for its gold reserves to reflect the current market value of the metal, that alone would solve a number of problems. More particularly, if the authorities would let the price of gold rise to its own natural equilibrium point, which would be multiples of its current price, it would take care of a host of difficulties.
Fifthly - at some point in the future I believe that this is exactly what is going to happen. Gold will be brought back into the monetary system in some form and will trade at a permanently higher level, which level it will then fluctuate around but will no longer trend. In other words, we will not see a repeat of the late 1979 - 1980 period which after it had rallied to then all time highs, embarked on a 20 year bear market. The current monetary system is showing severe signs of stress and all this talk coming from the emerging economic powerhouses about changes to the system and the Dollar as the sole reserve currency is not idle but reflects where we are headed. This obviously is not something that is going to happen overnight but I believe the die is cast and it is inevitable, especially now that the Fed has embarked on its path of madness euphemistically known as Quantitative Easing.
There is nothing written anywhere in stone that states the US Dollar must remain the sole global reserve currency. One can easily point to the history of Pound Sterling. During its heyday and at the height of British economic power, any such talk suggesting it would be dethroned must have seemed absurd at the time. Yet, history shows us that is exactly what did happen, for much the same reasons that are now plaguing the United States. Bretton Woods was supposed to have solved all that but it too has failed, thanks to the weakness of men.
Rather than spending untold hours of precious time answering individual emails, I decided to just post a short response to this here.
First of all, there is no need for the US government to confiscate gold because they do not need it. The reason it was confiscated in the early 30's by the Roosevelt administration was because they needed more gold in order to ramp up the money supply. While the domestic gold standard was killed, the US was still on an international gold standard. Balance of trade payments was still handled in gold and it would either flow in or flow out of nations depending on how that trade balance rose or fell with its trading partners.
Today, there is no gold standard which is also the reason that there exists such massive trade imbalances among nations.
Secondly - the US monetary authorities do not need gold to ramp up the money supply. Think two little letters: "Q" and "E" and put them together: "QE".
QE1 was $1.25 TRILLION and QE2 is $600 billion or $900 billion if you count agency debt. Has the Fed needed a single ounce of gold to add $2 trillion in new "money" to the system?
Thirdly - there is no shortage of gold among the US holdings in the sense that we have a significant amount. Reported holdings of the US are over 8,000 tons. Of course we do not really know how much gold we actually do have because we cannot audit the stuff and have to trust our masters not to lie. But that is besides the point. The real point is the US government officially values the sum of our gold holdings at the ridiculous price of $42.22 when the market price is closer to $1,400.
http://www.fms.treas.gov/gold/index.html
Fourthly - If the US would merely change the way it accounts for its gold reserves to reflect the current market value of the metal, that alone would solve a number of problems. More particularly, if the authorities would let the price of gold rise to its own natural equilibrium point, which would be multiples of its current price, it would take care of a host of difficulties.
Fifthly - at some point in the future I believe that this is exactly what is going to happen. Gold will be brought back into the monetary system in some form and will trade at a permanently higher level, which level it will then fluctuate around but will no longer trend. In other words, we will not see a repeat of the late 1979 - 1980 period which after it had rallied to then all time highs, embarked on a 20 year bear market. The current monetary system is showing severe signs of stress and all this talk coming from the emerging economic powerhouses about changes to the system and the Dollar as the sole reserve currency is not idle but reflects where we are headed. This obviously is not something that is going to happen overnight but I believe the die is cast and it is inevitable, especially now that the Fed has embarked on its path of madness euphemistically known as Quantitative Easing.
There is nothing written anywhere in stone that states the US Dollar must remain the sole global reserve currency. One can easily point to the history of Pound Sterling. During its heyday and at the height of British economic power, any such talk suggesting it would be dethroned must have seemed absurd at the time. Yet, history shows us that is exactly what did happen, for much the same reasons that are now plaguing the United States. Bretton Woods was supposed to have solved all that but it too has failed, thanks to the weakness of men.
News Flash - Bernanke not concerned by China selling US Treasurys
This news flash came down the Dow Jones wire this morning with bells and whistles announcing its appearance.
My immediate reaction -
Of course not - why should he be when the Fed is busier than a one legged man in an ass kicking contest buying up all the Treasuries it can gets its hands on.
The Fed has already surpassed China in terms of the overall amount of Treasuries it holds and at its current rate of QE related buying, is on target to surpass both China and Japan combined!
For those of you who might want to see a visual chart of the same, please refer to the piece I posted here a while ago.
http://traderdannorcini.blogspot.com/2011/02/treasury-holdings-of-fed-china-and.html
My immediate reaction -
Of course not - why should he be when the Fed is busier than a one legged man in an ass kicking contest buying up all the Treasuries it can gets its hands on.
The Fed has already surpassed China in terms of the overall amount of Treasuries it holds and at its current rate of QE related buying, is on target to surpass both China and Japan combined!
For those of you who might want to see a visual chart of the same, please refer to the piece I posted here a while ago.
http://traderdannorcini.blogspot.com/2011/02/treasury-holdings-of-fed-china-and.html
CPI rises but no worries
The following story from Dow Jones details several factors which reveal the totally contradictory claims being made by so many analysts that dominate the financial reporting here in the US.
On the one hand, we are continually reminded over and over again how the overall economy is improving. We are told that business profits are rising in an environment which is seeing strong global growth and that this strength is going to be reflected in the US where predictions are for a growth in the range of at least 3.5 % this year.
On the other hand, we are told that inflation is not a problem. Businesses for the most part are choosing not to pass along the rise in input costs reflected in the PPI from yesterday because of the lackluster job market and the resultant reluctance of the consumer to spend. In short, businesses do not want to risk losing market share in this sort of environment and thus upward pressure on prices at the retail level is minimal.
The big problem with this line of reasoning is that it is utterly illogical. Perhaps this is what happens when the school system no longer teaches students how to actually think.
If business is reluctant to pass on price increases then how can profits grow particularly if the consumer is supposedly reluctant to spend. If I spend x dollars to produce a product and sell it for x + 2 dollars, what happens if the cost to produce the product goes up to x + 1 and I still am forced to sell it for x + 2? Obviously profits shrink. If profits shrink how can I expand hiring and put more people to work? Answer - I cannot.
So which is it? Is the economy gathering steam or is inflation not a problem? It cannot be both.
I believe that the Fed's liquidity injections are indeed feeding into the economy and that inflation is indeed a problem and that no business can long survive in an environment in which its input costs are rising and yet it does not pass along the rise to its end users or to the consumer. Business exists to make profits - no profits - no growth; no growth - no hiring.
Just today the CCI (Continuous Commodity Index) pushed yet to another all time high in price before retreating somewhat. As far as I am concerned, this index is the best economic indicator that I need to tell me whether or not input costs are rising.
As mentioned in my post yesterday, once the velocity of money begins to increase in the US economy, we will see more and more that statistic juggling notwithstanding, inflation pressures will be on the rise here, just as they are all over the globe. Prices will indeed be forced upward at the retail level just as they already are rising, expect for the fact that the government conjurers continue attempting to sweep such increases away with their contemptible manipulation of the useless CPI.
OH by the way, gasoline prices hit a 29 month high today at the Nymex! But don't worry - core inflation is completely tame!
DJ UPDATE: US Jan Core Inflation, Weekly Jobless Claims Both Rise
Thu Feb 17 10:41:20 2011 EST
On the one hand, we are continually reminded over and over again how the overall economy is improving. We are told that business profits are rising in an environment which is seeing strong global growth and that this strength is going to be reflected in the US where predictions are for a growth in the range of at least 3.5 % this year.
On the other hand, we are told that inflation is not a problem. Businesses for the most part are choosing not to pass along the rise in input costs reflected in the PPI from yesterday because of the lackluster job market and the resultant reluctance of the consumer to spend. In short, businesses do not want to risk losing market share in this sort of environment and thus upward pressure on prices at the retail level is minimal.
The big problem with this line of reasoning is that it is utterly illogical. Perhaps this is what happens when the school system no longer teaches students how to actually think.
If business is reluctant to pass on price increases then how can profits grow particularly if the consumer is supposedly reluctant to spend. If I spend x dollars to produce a product and sell it for x + 2 dollars, what happens if the cost to produce the product goes up to x + 1 and I still am forced to sell it for x + 2? Obviously profits shrink. If profits shrink how can I expand hiring and put more people to work? Answer - I cannot.
So which is it? Is the economy gathering steam or is inflation not a problem? It cannot be both.
I believe that the Fed's liquidity injections are indeed feeding into the economy and that inflation is indeed a problem and that no business can long survive in an environment in which its input costs are rising and yet it does not pass along the rise to its end users or to the consumer. Business exists to make profits - no profits - no growth; no growth - no hiring.
Just today the CCI (Continuous Commodity Index) pushed yet to another all time high in price before retreating somewhat. As far as I am concerned, this index is the best economic indicator that I need to tell me whether or not input costs are rising.
As mentioned in my post yesterday, once the velocity of money begins to increase in the US economy, we will see more and more that statistic juggling notwithstanding, inflation pressures will be on the rise here, just as they are all over the globe. Prices will indeed be forced upward at the retail level just as they already are rising, expect for the fact that the government conjurers continue attempting to sweep such increases away with their contemptible manipulation of the useless CPI.
OH by the way, gasoline prices hit a 29 month high today at the Nymex! But don't worry - core inflation is completely tame!
DJ UPDATE: US Jan Core Inflation, Weekly Jobless Claims Both Rise
Thu Feb 17 10:41:20 2011 EST
(Adds analyst comment, background.) By Luca Di Leo and Jeffrey Sparshott Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--U.S. consumer prices continued to rise in January as energy and food prices increased, but underlying inflation remained tame as many companies struggled to pass on higher raw materials costs to consumers. The seasonally adjusted consumer price index last month increased by 0.4% from December, the Labor Department said Thursday. Over the last 12 months, prices were up 1.6% before seasonal adjustments. But underlying inflation, which excludes volatile energy and food prices and is considered a better measure of price trends by the Federal Reserve, rose by 0.2%. The annual underlying inflation rate stood at 1.0% last month, below the Fed's informal target of just under 2.0%. Economists surveyed by Dow Jones Newswires ahead of the release expected consumer prices to rise by 0.3% and the core consumer price index to gain 0.1%. In December, consumer price inflation showed a 0.4% monthly rise, revised from a previously reported 0.5% gain. Earlier this week, producer price data, which measure how much manufacturers and wholesalers pay for goods and materials, showed underlying wholesale prices rising the most in more than two years. That sparked concern that inflation could start to rise more sharply. But Thursday's figures indicate that most companies aren't passing along price increases to consumers. One exception: clothing stores. Apparel prices were up 1% in January. "Looking ahead, with cotton prices at an all-time high in nominal terms, apparel manufacturers have stated their intention to raise prices for spring apparel, so this component may be on an upward trajectory in the coming months and add to the core," Royal Bank of Scotland analysts said. But overall, firms are struggling to pass higher commodity prices on to consumers due to persistently high unemployment, which is keeping Americans cautious about spending. Underscoring the soft jobs market, the Labor Department Thursday said the number of U.S. workers filing new claims for unemployment benefits increased by 25,000 to 410,000 in the week ended Feb. 12. Economists surveyed by Dow Jones Newswires had expected claims would rise last week by 17,000 to 400,000. "With the unemployment rate still at 9.0%, there will be plenty of downward pressure on underlying prices and so we don't expect core inflation to trend upwards," said Paul Ashworth, chief U.S. economist at Capital Economics. New claims figures have been volatile in recent weeks due to severe winter weather. Now, the jobs market appears to have stabilized near January's levels. The four-week moving average of new claims, considered a more reliable indicator because it smoothes out volatile data, increased 1,750 to 417,750 in the week ending Feb. 12. Jobless claims have been on a gradually downward trend since September 2010. "The longer-run trend in the claims data remains consistent with a healing labor market," said JPMorgan Chase economist Daniel Silver. At their last meeting three weeks ago, Fed officials said they still expect slow price increases over the next two years and unemployment to remain close to 9.0% until the end of 2011. Thursday's Labor Department reports showed that higher prices for energy commodities and food accounted for more than two-thirds of the rise in consumer prices. Food prices rose 0.5% in January, the biggest increase since September 2008, with all six major grocery store food groups showing gains. Energy prices continued their recent string of increases, rising by 2.1% last month as the gasoline index went up for the seventh month in a row. In the meantime, real average weekly earnings fell 0.3% over the month in January as both the average workweek and hourly earnings dropped, the Labor Department said. The Labor Department's report on consumer prices can be found at: http://www.bls.gov/news.release/pdf/cpi.pdf. -By Luca Di Leo and Jeffrey Sparshott, Dow Jones Newswires; 202-862-6682; luca.dileo@dowjones.com (END) Dow Jones Newswires 02-17-11 1041ET Copyright (c) 2011 Dow Jones & Company, Inc.
Wednesday, February 16, 2011
Bond market
Following is a chart of the long bond laid out for you to examine.
About two weeks ago, the bonds experienced a significant price move from a technical perspective as they brokedown out of a nearly 7 week long consolidation pattern. That move signified a shift in trader psychology towards an inflationary bias and away from deflation that signified deflation as a viable theme was dead for the time being.
Since that time the bonds have managed to rally right back up into the level which had held all downside reactions in price over that 7 week period mentioned above.
From examining the chart one can see that they have reached a point at which a great deal of indecision or uncertainty in regards to pushing them back any higher has now returned.
Today the FOMC released the minutes of its Jan 25-26 meeting last month in which they expressed more optimism for the prospects of growth in the US economy moving forward this year while at the same time noting that job growth was anemic. The majority were looking at a period of at least 5 - 6 years before the number of jobs being created would be back at levels more commensurate with long term data from the US. A minority were talking a window past 6 years.
The point in this is that the Fed is trying to have its cake and eat it too. On the one hand they are eager, nay, almost begging for the markets to praise them for the apparent success of their policies. As you know those policies have been much maligned by an increasingly larger number of pundits who are looking at the longer term inflationary impact of the same. They are eager to point out the increase in growth as proof of their wisdom in moving down this unconventional path. However, they are also trying to tamp down expectations for job growth.
I get the distinct impression that the FOMC governors are attempting to send mixed signals to the market specifically to keep the rates on the long end of the yield curve from moving higher. In other words, they want to keep up the happy talk to gin up the stock market but not to the point where they cause another implosion in the bond market. They want a stock market that moves higher at the same time that the bond market is hesitant to push lower.
At some point the bond market will catch on to this game and will look past the rhetoric at solid data which is suggesting that more and more the Central Banks are way behind the curve when it comes to dealing with the inflation beast that has been loosed upon mankind.
We have seen in the last few days reports out of China, the UK and Japan detailing their problems with this beast. Can it really be expected that the mother of all liquidity creators, the Federal Reserve, has not given rise to the same here in the US?
Perseus will need more than the head of Medusa to kill this Kraken. Once the velocity of money increases, the Kraken will make its appearance here in an undeniable fashion.This is what the bond market is focusing on. Traders see it and know it is coming. So does the Fed but they are attempting to keep the QE policy front and center on traders' minds so as to prevent them from unloading too heavily on the long end of the market. I do not think it is going to work.
If I am correct, bond traders will use all rallies in bonds as an opportunity to sell. If that is the case, the chart will soon reflect that.
About two weeks ago, the bonds experienced a significant price move from a technical perspective as they brokedown out of a nearly 7 week long consolidation pattern. That move signified a shift in trader psychology towards an inflationary bias and away from deflation that signified deflation as a viable theme was dead for the time being.
Since that time the bonds have managed to rally right back up into the level which had held all downside reactions in price over that 7 week period mentioned above.
From examining the chart one can see that they have reached a point at which a great deal of indecision or uncertainty in regards to pushing them back any higher has now returned.
Today the FOMC released the minutes of its Jan 25-26 meeting last month in which they expressed more optimism for the prospects of growth in the US economy moving forward this year while at the same time noting that job growth was anemic. The majority were looking at a period of at least 5 - 6 years before the number of jobs being created would be back at levels more commensurate with long term data from the US. A minority were talking a window past 6 years.
The point in this is that the Fed is trying to have its cake and eat it too. On the one hand they are eager, nay, almost begging for the markets to praise them for the apparent success of their policies. As you know those policies have been much maligned by an increasingly larger number of pundits who are looking at the longer term inflationary impact of the same. They are eager to point out the increase in growth as proof of their wisdom in moving down this unconventional path. However, they are also trying to tamp down expectations for job growth.
I get the distinct impression that the FOMC governors are attempting to send mixed signals to the market specifically to keep the rates on the long end of the yield curve from moving higher. In other words, they want to keep up the happy talk to gin up the stock market but not to the point where they cause another implosion in the bond market. They want a stock market that moves higher at the same time that the bond market is hesitant to push lower.
At some point the bond market will catch on to this game and will look past the rhetoric at solid data which is suggesting that more and more the Central Banks are way behind the curve when it comes to dealing with the inflation beast that has been loosed upon mankind.
We have seen in the last few days reports out of China, the UK and Japan detailing their problems with this beast. Can it really be expected that the mother of all liquidity creators, the Federal Reserve, has not given rise to the same here in the US?
Perseus will need more than the head of Medusa to kill this Kraken. Once the velocity of money increases, the Kraken will make its appearance here in an undeniable fashion.This is what the bond market is focusing on. Traders see it and know it is coming. So does the Fed but they are attempting to keep the QE policy front and center on traders' minds so as to prevent them from unloading too heavily on the long end of the market. I do not think it is going to work.
If I am correct, bond traders will use all rallies in bonds as an opportunity to sell. If that is the case, the chart will soon reflect that.
Daily Gold Chart and Market Comments
A development complicating matters over in the volatile Mid East spurred additional safe haven buying in gold, dragging up silver in the process in today’s session. Iran Suez Canal on their way to the Syria Mediterranean Sea . Needless to say, it adds yet another piece of uncertainty in a puzzle that is getting quite mixed up. There are also reports that now Libya
Crude oil, both W TI and B rent moved higher on the news with B rent of course leading the charge. W ith fear comes gold buying as well and the buying was enough to take it into plus territory and up into resistance at $1380. It did fade however coming into the close which is a bit disappointing. A strong chart close today would have set it up for a run back towards $1400. As it stands now, the price action is registering some uncertainty or hesitation on the part of the bulls.
Gold will be keening watching the Mid East overnight for any news.
Open interest registered a sharp increase in yesterday’s run through resistance by gold. Specs came back in a big way adding a bit over 8,000 contracts in what has to be viewed as healthy for the market. For gold to punch through $1380, we are going to need another comparable surge in open interest.
Silver ran right into resistance just shy of $31 once again. For the time being that level is serving as overhead chart resistance. Once that gives way, the high near $31.25 will fall. Same thing as gold - the fade from the session's best levels is disappointing and is registering as indecision on the price chart. Downside support lies first at $30.50 on any setbacks followed by another level just above $30. If silver is going to mount another sharp leg upward, it must hold $30 on any downside test.
The HUI is maintaining its hold above 540 although it is a bit tenuous here. I would like to see it put a little more space between itself and this level especially to end this week. It has pushed past the 50 day moving average which is bullish but I think more potential longs on the sideline are waiting for it to convince them a bit further before coming back in. If the broader equities shrug off the pressure that came from the Iranian warship news, the HUI should move higher and give us that space we are looking for.
PPI doubles Wall Street Expectations
Giving further credibility to growing suspicions that Fed Chairman Ben "there ain't no stinkin' inflation" Bernanke lives in a cocoon and has been able to somehow miraculously suspend his body's need for actual food, we get the news today that the Producer Price Index, which measures prices at the wholesale level, climbed to its highest level in more than two years.
DJ UPDATE: US Jan Producer Prices +0.8%; Core PPI +0.5%
Wed Feb 16 09:16:43 2011 EST
DJ UPDATE: US Jan Producer Prices +0.8%; Core PPI +0.5%
Wed Feb 16 09:16:43 2011 EST
(Updates with analyst comment, details.) By Jeff Bater and Luca Di Leo Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--Underlying wholesale prices in the U.S. climbed during January to their highest in more than two years as prescription prices rose, which may raise concerns about inflation as the economy accelerates. The so-called core rate of inflation was more than double what Wall Street expected. Nearly 40% of the advance was due to a surge in prices for pharmaceutical preparations. The index of producer prices, which measures how much manufacturers and wholesalers pay for goods and materials, rose a seasonally adjusted 0.8% in January from December, the Labor Department said Wednesday. The rise was driven by higher energy prices. But core prices, which strip out volatile food and energy items and are considered a more reliable indicator of inflation, increased 0.5% last month. Economists polled by Dow Jones Newswires were expecting a 0.9% increase in overall producer prices and a 0.2% increase in the core index. The core rate was the highest since October 2008, when it climbed 0.8%. "Evidence of an inflationary rebound continue to pour in," Miller Tabak analyst Dan Greenhaus said. To be sure, inflation pressures remain quite low. Year over year, the core index was up just 1.6%, in line with the Federal Reserve's mandate of price stability. The U.S. economy has been picking up speed in recent months amid rising international commodity prices, fanning fears about inflation. But the spillover into final consumer prices in the U.S. has been very limited so far and recent declines in crude oil and natural gas prices should provide some relief on energy prices in February. U.S. retailers and manufacturers have been reporting rising costs but haven't been able to pass their added overhead to consumers because of competition and cautious spending by Americans. The U.S. jobless rate remains elevated at 9.0%, keeping a lid on spending and wages. Wednesday's data said energy prices rose 1.8% in January from December, with increases in gasoline and diesel fuel. Food prices rose only 0.3% last month. As for other goods that influence the core index, prices climbed for plastic products, alcoholic beverages, commercial furniture, and jewelry. With underlying inflation low, the Fed resumed buying government bonds in November to boost jobs and the economy in a $600 billion program that is due to end in June. A top Fed official Tuesday warned that any further move by the central bank to reduce unemployment could bring high inflation. Richmond Fed President Jeffrey Lacker said the central bank is keeping a close eye on inflation, especially now that the U.S. economy is stronger and global food and energy prices are high. Prices of raw materials, known as crude goods, rose by 3.3% in January from the previous month. Intermediate prices in the pipeline climbed 1.1%. Economists expect a report out Thursday to show consumer prices rose a monthly 0.3% last month, but underlying inflation likely rose just 0.1%. -By Luca Di Leo and Jeff Bater, Dow Jones Newswires; 202-862-6682; luca.dileo@dowjones.com (END) Dow Jones Newswires 02-16-11 0916ET Copyright (c) 2011 Dow Jones & Company, Inc.
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